Commercial Vehicle Group Inc (CVGI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth-quarter 2011 Commercial Vehicle Group, Incorporated earnings conference call.

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

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

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

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Chad Utrup.

Please proceed.

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 fourth quarter of 2011.

And at the end we'll take time to answer your questions.

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 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 that was able to join our call today.

We're pleased to report that during the fourth quarter of 2011 we achieved our highest revenue and operating income levels since the fourth quarter of 2006.

And for those keeping score, it was also our 11th consecutive quarter of operating income improvement, excluding impairment and restructuring charges.

Indications are that we will continue to see good strength in North American Class 8 market in 2012.

Global construction also remains a key revenue generator for CVG and currently shows little or no signs of weakening.

As we predicted at the beginning of last year, our military sales dropped from their 2010 highs and remained relatively flat in 2011, with a slight decline in orders during the fourth quarter.

Barring any new major defense contracts in 2012 we don't see that changing.

During 2011 we added new business in Asia that included domestic Chinese producers such as Foton Motors.

The new Foton business should result in annualized revenues of approximately $11 million in 2012 and grow to more than $30 million at full production.

We also gained new Chinese business with global companies such as John Deere and Cummins.

Last night we announced a letter of intent between CVG's Electrical Systems Group and Cummins Emissions Solutions that calls for CVG to supply Cummins on-highway program with wire harnesses, to begin in 2013.

Under this new program we will supply Cummins facilities in both North America and China with products produced in our Agua Prieta, Mexico and Shanghai, China facilities.

CVG products will be used on after-treatment systems provided by Cummins to power on highway trucks.

Cummins is a pioneer in helping Chinese and other global customers achieve their fuel efficiencies and emission goals.

We are proud to have been chosen to work with them on these products.

The annual value of this new business to CVG is around $7 million to $8 million at its peak.

This new business will start up at several million dollar income with the new 2013 fuel economy regulations in aftermarkets and build as Asian countries adopt European Union emission regulations.

It may take until 2014 and '15 for full ramp-up to be achieved.

In 2011 we acquired Bostrom Seating and Stratos Seating.

These acquisitions presented a great opportunity for us to further develop our aftermarket sales and expand our brand offerings in North America, while also increasing our global footprint in Australia.

The integration of these companies is proceeding successful and according to plan.

In September 2011 we announced a new joint venture with Hema Engineering in India.

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

Over time it will also supply seats and components to other global CVG locations.

We believe India represents a significant opportunity for CVG to grow, and this new joint venture fits well within our global expansion strategy.

This month we were pleased to receive official notification that our electrical systems facility in Edgewood, Iowa has been awarded Platinum status under the Caterpillar Supplier Quality Excellence Program.

Only the highest performing suppliers meeting Caterpillar's stringent requirements covering process capability, quality, continuous improvement and Six Sigma deployment can receive Platinum-level recognition.

Congratulations to our Edgewood team for their successful efforts to earn the highest rating in Caterpillar's rigorous quality program.

Looking forward, our efforts to gain new business in emerging markets will cause us to invest more in CapEx, start-up and development expenses, as well as internal staffing needs to support our growth plan and, in many cases, well before new business or growth may occur.

Prime examples include the construction we began last year on a new CVG facility in Saltillo, Mexico and Beijing.

These projects are continuing on time and within budget.

We were pleased to finish 2011 with a significant cash position and no debt on our credit facility.

Given our solid balance sheet and liquidity, we believe we are in excellent position to continue our search for new acquisitions and other global opportunities.

We will only be seeking those that fit into our strategic goals of global expansion, product, end market, and customer diversification.

In summary, our strategy and vision remains the same.

We continue to expand 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, as well as solid and sustainable financial foundation.

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

Thanks, Merv.

Our revenues, as you saw, for this past quarter were $225.8 million, which is an increase of $67.8 million, or 43%, from the fourth quarter of 2010.

This increase is primarily the result of our global OEM truck market revenues, which increased nearly $47 million, or 71%, from the fourth quarter of 2010.

Our global OEM construction revenues also saw a sharp increase of approximately $12 million, or 28%, from the same period last year.

All our other end markets collectively increased approximately $9 million, or 18%, from the prior-year quarter.

Operating income was $16.1 million, or 7.1% of revenues, which is an improvement of approximately $10.7 million over the prior-year period.

Sequentially, revenues were up approximately $8.9 million from the third quarter of 2011, with an operating income increase of $2.5 million, or 28% contribution margin.

With start-up costs related to our Saltillo and Beijing expansions beginning to subside, along with strong focus on costs and margin improvement, we are extremely pleased with our performance this quarter and the contribution on incremental revenues.

Depreciation and amortization was $3.1 million and capital spending was $6.9 million for the quarter.

And our interest expense was generally in line with what we discussed on our last-quarter conference call.

Tax provision for the quarter was slightly lower than expected and is primarily related to tax expense for our foreign operations, offset by changes in valuation allowances for our US-based entities.

Looking forward to 2012, our estimate for tax provision at this time is approximately 20% of pre-tax income.

We will continue to monitor the status of our valuation allowances as we progress through the year.

You will notice that we did record approximately $15,000 attributable to our noncontrolling interest.

This was related to the new India joint venture with Hema Engineering and represents their 10% interest in the JV for the period.

From a fully-diluted EPS standpoint, the quarter came in at $0.36, which we are again 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 $88 million.

This cash balance, combined with our ABL revolver capacity, means we have approximately $125 million of liquidity immediately available as we continue to look at strategic opportunities.

As we look to 2012, while we are not providing guidance, our estimates for North American Class 8 units is in the range of 280,000 to 290,000 units.

We currently expect our global OEM construction market to remain flat to up 5% from what we saw in the last half of 2011.

In addition, we would like to remind you of certain timing events within our cost structure, which include annual wage adjustments and certain customer price concessions beginning January 1 of 2012.

While this can impact our sequential contribution margin when comparing Q4 of '11 to Q1 of '12, we expect our operating income, or EBITDA, contribution margin on the change in revenues for the full year 2011 to 2012 to remain in the 20% to 25% range, excluding any one-time investment expenses such as Mexico, Beijing, or India, which we saw last year, as an example.

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

As Merv mentioned, this is also our 11th consecutive quarter of operating income improvements when excluding impairment and restructuring charges.

This is something we are 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.

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

Thank you.

(Operator Instructions) Ann Duignan.

Could you talk a little bit about the near term?

We've heard recall of trucks for braking issues across several OEMs.

Are you seeing any disruption in your orders or your build schedules from your OEM customers in North America on the back of that?

Not really.

We understand that the brake company in question has got a retrofit that they're going to the field with.

And also keep in mind that they do not supply 100% of the OEMs.

Okay.

So are you saying you're more leveraged to the OEMs who do not choose Bendix?

Is that -- ?

What I'm saying is that we have not seen an impact yet at this point.

And specifically, on -- there are OEMs that do not use them that we have obviously seen no impact on.

And the ones that are using them we have not seen an impact yet.

Okay, thanks.

I thought it might hit you a little bit in Q4, but obviously it didn't.

So I just want to make sure I'm modeling --

[Yes.]

-- correctly.

My follow-up question, then, is on China.

Can you just talk a little bit about what your team is seeing there?

We've got very, very tough comps, some question about excess inventory in the field.

Can you talk about what you guys are seeing, specifically, in China?

Thanks.

Well, we've seen a little bit of slowdown in Q1, or a little bit of softening.

But we think it will pick up in the start of Q2.

Even with the market softening, it's still a huge marketplace for us.

And in most cases it's brand new territory for us, so even with the softening market it's still a great region for us to be in.

Okay.

And based on what -- what are you seeing out there that gives you confidence that you will see a pickup in Q2?

Or is it just you hope?

We see that there's been some inventory -- we see a slow comeback from the Chinese New Year.

And, frankly, the way orders and customers -- we just got back, Chad and I and two of the division presidents from China and India, after the first of the year, right before Chinese -- during Chinese New Year, actually.

And met with several of our main customers there and looked at their projections.

And that's what their projections show.

Okay.

So their plan is to reaccelerate production in the near term?

Is that --

Yes.

-- how I should read it?

Okay.

Thank you.

And then just finally, maybe the same question in Europe.

What are you seeing in Europe, particularly in construction?

We're seeing some softening.

But that's not a major hit for us.

Yes, we're seeing some softening, Ann, but it's not impacting us significantly.

Why do you think that is?

Why is it softening or why is it not --

No, no, I'm not going to ask you to guess why the market's slowing, but if the market's slowing and it's not impacting you is it just a matter of time or, again, is your mix leveraged to some (multiple speakers)?

Yes, it's more the latter, Ann.

Our mix for European construction and truck is -- we're more leveraged to all other countries other than Europe at this point.

So that's why I say it's not a significant impact to us.

We are seeing some softening, but we don't expect it to be a huge impact for us.

Okay.

Great performance, great incrementals.

I'll just leave it there.

I think we'll talk to you in the near term.

Well, thank you, Ann.

Thanks for listening and thanks for the good questions.

Robert Kosowsky.

Really good margins.

Good job.

I was wondering, Chad or Merv, if you just could maybe build a bridge between 3Q and 4Q?

Like were there any -- what were some of the major swing factors in the profitability?

Was it some raw material recovery that might have given you a lift?

Was it Saltillo and Beijing materially stepping down?

Any other insight into that?

Well I think, if you remember, we said that there had been some major disruptions at some of our OEMs and that instead of letting the temps go we retained them because we were in the middle of training them and it made no sense for us to drop them off and then bring them back.

So we had that and then we had some material recovery.

I mean, there was just a little bit of several things.

Keep in mind the numbers in Q3 were still part of the consecutive 11 quarters in a row of improvement.

Yes.

It's not really one thing, Rob, as Merv said.

It's a little bit of what he mentioned and you've got things like Mexico expansion.

We had some costs in Q3; we still had some costs in Q4.

Came down a little bit from Q3 when you're looking at it sequentially.

Peso helped us a little bit, not significantly.

So it was a combination of a lot of things and then some specific cost control measures, as Merv mentioned, that really drove the sequential margin up.

So the cost control measures, that was kind of a function of just increased -- or more appropriate utilization of your labor and your plants?

Is that the correct way of looking at it?

Well, I guess you could look at it that way.

I think the way we prefer to look at it is, we didn't take a hit on labor in Q4 because we'd let the employees go for three weeks and then had to bring them back, or try to find more and then retrain the labor.

So I guess it was just we didn't knee-jerk react in Q3 and drop the employees off and then try to find new ones in Q4.

So when they hit Q4 they were already properly trained and were able to work more efficiently.

Okay.

If revenue were to flat line at this quarterly run rate level, are there further efficiencies or further margin expansion that could occur?

Or is this kind of an optimized profitability stance, given what your mix looks like right now, if we were to just kind of freeze Q4 and roll that forward?

Well, we always start out the first of the year with productivity give-backs.

And you start with the materials that -- where you're working on efficiencies where you've got programs in for the year that just start out in January too, January also, or Q1 also, and then ramp up.

So you've got all kinds of moving things that will not freeze.

But in overall aspect, if the market stayed the same and everything stayed the same, we've always predicted that we would have between 20% and 25% incremental margins.

So that's what we're always looking for.

And of course we're always looking to improve the baseline EBITDA percentage.

Yes.

And we have many projects, Rob, that focus on material cost reduction and taking cost out of the products.

So without getting specific what would it be, there's always those types of things.

I think the other key things to point out -- I mentioned it earlier, but there's a couple things.

Really when we look at timing through the year, we've got wage-type inflation or increases that hit us on January 1st.

So we have timing of events which will impact us in the first quarter and then really flatten out for the balance of the year.

And then we also have some finalization of the Saltillo expansion that will probably hit us more in the last half of this year.

And numbers -- the wage thing could be $800,000 to $1,000,000 just kind of one time as we roll into the new year.

And probably the Mexico expansion is probably about $500,000 to $750,000 in the second half of the year, something like that.

Those are really the key one-time things that we'd probably point out at this time.

And the ramp-up of our customer in China.

They're ramping up.

This is a new program for them also, so their ramp-up.

And China's also starting into their -- and that's one thing, also, to go back to Ann's question about China.

China has implemented a new regulation on their engines.

And I think they may be -- their engine manufacturers are kind of like we were in North America.

They may be ready before their fuel industry is ready to supply the type of diesel that they're wanting.

So we're seeing that as a little bit of a slowdown, too, as they regain footing and decide what they're going to do.

Okay, that's helpful.

And then, can you talk about the amount of new business that's going to hit in 2012 and how does that flow through the year?

Like what's the cadence of that actually hitting your P&L?

I think what we've put out there over the last 12 months -- and the Cummins announcement doesn't really hit until 2013.

But it's fairly -- as far as we're sitting here today, Rob, it's fairly evenly spread out throughout the year.

I think our number was about $45 million to $50 million that was going to hit in production for 2012.

And we're going to start seeing that already in Q1.

So it's fairly evenly spread.

Okay.

So we should expect to see some sequential revenue growth, I guess?

Yes, probably more in the second quarter and third quarter, more weighted towards the last three-fourths of the year.

But we'll see some in Q1.

Okay.

So maybe Q1 looks a little bit like Q4, but then you get the better ramp throughout the year?

Yes.

The timing thing for us for Q1 is more related to the productivity give-backs and annual wage increases.

This is nothing new.

It's always been a timing impact for us.

But I want to make sure that we're clear on that, because that does impact us Q1 for sure.

All right.

Thanks a lot, guys.

(Operator Instructions) David Leiker.

This is Joe on the line for David.

Just want to dive into the Cummins award.

Is this your first piece of new business on -- in after-treatment products?

Oh, my.

We're not going to take any more questions like that.

They're too hard.

I think so.

It is our first award on the engine in the after-treatment.

We do have some other wiring on the engine with some of the OEMs, but this is the first one in this type of after-treatment.

And just to be clear, Cummins Emissions Solutions not only supplies Cummins, but they also supply other OE engines, I believe?

Yes.

Okay.

And this award is for both of those categories?

All we are at liberty to say is that it's for Cummins [Engine] Solutions.

Do you think now that you've picked up this award there's opportunities with the other big after-treatment guys like a Tenneco or a Foresia?

I'm not sure.

That's not an area that we have really started looking at focusing on.

Cummins we've had a really great relationship with them, from having worked and lived in Columbus, and then with some of our Board that have had great relationships with them.

So it was just a natural meeting together between the two companies.

And it was one that we had pursued as well as talking to them.

And obviously, with winning awards from Cat for their highest quality level award that they offer for this type of product on the wiring, you would think that that would be a natural opportunity.

But it's not some that we have particularly pursued.

Okay, great, that's helpful.

Do you think, looking at your mix of business, and I don't have the updated 2011 numbers but I think you were, like, 40% seating, 40% wiring harnesses.

Do you think that mix is going to pretty much stay constant over the next few years?

I know you've made some seating acquisitions, so that might drive up the mix of your business.

And I'm just wondering if that has any implications for the profit contribution that you see.

Well, the profit contribution is pretty well level across our different businesses.

And the only place where margins substantially vary is usually from aftermarket military.

And, of course, military is down and we're putting a big effort in growing the aftermarket.

Joe, too, just to clarify, for '11, seats was around 43% and wire harnesses alone was really closer to 22%.

Just want to make sure I clarify that for you.

Oh, okay.

Great, thanks Chad.

And then one last one -- on the construction piece of your business I'm wondering if, one, you could maybe detail what China is as a percent of that number.

And then, if you look at the construction industry in China, the comps there on just excavator sales are, like, down 20% or 30% I think in Q4.

I think January actually saw it down 50% year over year.

And you're still growing your business 20%.

So is it purely new business?

Should we take the delta there and figure that's incremental business that you just picked up?

Or is it that your customer exposure you think that are just outperforming the broader market that's still having you grow your construction revenues pretty solidly?

For 2011 that's a tough question.

I don't have all the data in front of me, Joe.

I think China may be 15% to 20% of our total construction business globally.

I'm shooting from the hip here, just roughly.

For 2011 our OEM global construction business was a little over $200 million, maybe $210 million and the China piece of that would be 20%, 25% of that at max.

I can get some more numbers.

I just don't have it in front of me.

But China represents really the biggest opportunity for growth for us in the construction market as evidenced with some of the awards that we've been talking about.

Okay.

And then just one housekeeping item -- did you give an estimate for what CapEx could be in 2012?

It will probably be close to 3% of sales, 2.75% to 3% of sales, very similar to '11.

Okay, great.

Thanks, guys.

Very good quarter.

Congratulations.

Robert Kosowsky.

Just a quick question -- what kind of growth did you see on the cab structures business this year?

And what's the outlook for that?

The cab structure, if we actually added stamping business, we added some Caterpillar business, and some exterior products for Class 5 through 7 trucks, the UPS, FedEx type trucks.

Okay.

And what's the outlook for that?

Because I know that it was a much bigger business back in, like, the last up-cycle in, like, '06 or so.

And I know that you did lose some business to in-sourcing over the years.

And I'm just wondering how this business comes back and kind of its impact on margins if it does come back.

Well, there's two types of business when you talk about the reduction in the size.

One was from when one of our customers relocated their business from Canada to Mexico.

And we chose not to -- and at the time we wouldn't have been able to afford to, frankly -- to establish a brand new plant in Mexico to be able to supply it.

And then the other one was when one of our major customers eliminated one of their brands.

So to grow the business there's going to have to be new platforms that come out, new growth that comes out, or, we start continuing to expand in the Class 5 through 7 marketplaces in different areas.

Or when some of the foreign-turned-domestic locate in North America, it opens opportunities for us since we have facilities that are already capable.

And I guess the next marketplace, which is one that we've played in and still continue to play in, is the niche vehicle, since we made vehicles like the Prowler, the SSR panels, and we also made the complete Ford GT body.

We're continuously working with people on niche vehicles.

And those aren't at liberty to be discussed ever, from my end.

But, yes, we do continue to look for growth for that business.

It continues to be a very strong market for us.

We are the supplier for Mack Trucks' cabs.

And it's 10% of our business last year and it's a very nice market.

It also provides us with design engineering revenues.

We worked on a new truck introduction for like a garbage truck for one of our customers.

We worked on a fire engine cab.

It continues to also be one of our focuses in our R&D center.

Okay.

And would the success in this product line have a better impact on margins?

Is it margin accretive, I guess, so to speak?

Most of our businesses are pretty much the same margin across each one, other than military and aftermarket.

Okay.

That's helpful.

And then, any outlook on the aftermarket side of the business now you have Bostrom in for a full year or so?

We continue to look at expanding that business.

We have added field representatives.

We rearranged some of our field marketing.

We're launching a brand new seat in Europe this year for aftermarket.

And we're launching a new construction seat for aftermarket in North America.

And we're launching a new aftermarket truck seat in North America.

And you'll see some of those at MATS this year.

Okay.

So you think you might see better than market growth in that market?

Oh, we're absolutely looking at a focus on growing the aftermarket.

Yes.

I mean, just for reference, our aftermarket and OE service and distributor business grew about 35% from '10 to '11.

So, yes, it's there.

Now, a portion of that is going to be Bostrom, but even without Bostrom it's probably grown 15% to 20%.

All right, that's helpful.

And good luck with 2012.

And, gentlemen, we have no more questions at this time.

Okay, thank you.

Appreciate everybody joining the call and look forward to speaking with you at the next quarter call.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

And have a great day.