Commercial Vehicle Group Inc (CVGI) 2012 Q1 法說會逐字稿

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

My name is Marie and I will be your operator for today.

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

We will conduct a question-and-answer session toward the end of the conference.

(Operator Instructions) As a reminder, this call is being recorded.

I would like to turn the call over to Merv Dunn, CEO.

Please proceed.

Good morning and thanks to everyone for joining.

At this point I would like to turn the call over to Jeff Vogel, Jeff is standing in for Chad Utrup today.

Chad is a little under the weather.

So, Jeff, would you go through the Safe Harbor language for us?

Thank you, Merv.

Thank you, everyone, and welcome to our conference call.

Before we begin today's call, I will read through our Safe Harbor language.

Merv will then give a brief Company update, and I will take you through our results for the first quarter of 2012.

Then we will 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 than 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 covenants, compliance, and liquidity; new product initiatives and economic conditions in the markets in which CVG operates; fluctuations in production volumes of vehicles for which CVG is a supplier; and risks associated with conducting businesses in foreign countries and currencies; and other risks detailed in our SEC filings.

I would now like to turn the call over to Merv.

Thanks, Jeff.

Thanks to all of you that's joined our call today.

We continue to see strong production volumes in the North American Class 8 market during the first quarter of 2012, as well as moderately positive trends in our bus and aftermarket orders for the quarter.

Although our global construction markets were relatively flat for the quarter compared to the fourth quarter of last year, we currently expect moderate uptick throughout the balance of the year, as we mentioned on our last conference call.

As you know, North American Class 8 orders have been fairly weak since the beginning of the year.

But we still believe that we will experience a healthy build rate through the end of 2012; and we have yet not adjusted our estimates of 280,000 to 290,000 units for North America.

We based our outlook on high fleet ages, which signal the continuation of replacement demand, along with the backlog of orders.

The American Trucking Association Monthly Freight index continues to show strong tonnage levels compared to a year ago, which should also help support continued demand for heavy truck.

We are pleased to report that our operating performance delivered solid financial results during the quarter.

We continued our trend of improved revenue and operating income.

This quarter marked our 12th consecutive improvement in operating income excluding impairments, and we are extremely proud of this trend.

At the end of the first quarter, we had $90 million on the balance sheet and no debt borrowed on our revolving credit facility.

With our solid balance sheet and our excellent liquidity, we feel we remain in an excellent opportunity to seek new business potentials on a global basis and are actively pursuing those opportunities.

Throughout the quarter, many of you have asked our acquisition strategy.

We continue to seek opportunities that fit into our strategic goals of global expansion, diversification, and product lines, and an increase in our customer base.

Size-wise, we will examine any opportunity we feel has the potential to add shareholder value.

As we have said before, we are primarily focused on emerging markets such as China, India, and Brazil, but we will also consider opportunities in Russia, Europe, and North America if they fit into our strategic business model.

CVG is made up of many acquisitions over the years, and acquisitions are an integral part of our growth strategy and remain the primary objective for the use of our liquidity.

As we discussed in the past, China has been a strong growth story for CVG, and we expect this year to see the highest revenue levels since we started production there in 2005.

We currently expect revenues, including internal product sales, to reach over $90 million this year from our China operation; and we are heavily focused on additional new business initiatives and growth of the domestic market.

We are currently targeting over $200 million in revenues by 2015 in China.

This type of growth is very exciting, and we are extremely optimistic that we can achieve the same level of success over time in India, as we continue to gain momentum throughout the year.

In March, we exhibited an array of products and new technologies at our 2012 Mid-America Trucking Show in Louisville, Kentucky.

At the show we had a special display which featured the new Care4 Station which we are producing for HealthSpot, Inc.

The Care4 Station is a fully enclosed medical kiosk which we helped develop from concept through prototype and into production.

It is designed to deliver primary care and specialty care to patients in settings such as pharmacies, truck stops, supermarkets, and workplaces.

CVG is interested in this exciting market, because we want to be an integral part of shaping health trends in the industry and, as a result, an integral part of the solution that drives cost in the industry.

We believe CVG can become a solid partner to our customers, fleets, and drivers across the country by utilizing the Care4 Station strategy.

We believe HealthSpot's advanced technology offers such a solution, and we are excited to be part of it.

In addition to working with drivers and our OEMs in this effort, we will manufacture key parts of the Care4 Station at multiple CVG facilities throughout the country.

All the pieces are then brought together and assembled into kits and shipped directly to the HealthSpot location, where they are assembled and tested before they are put into operation.

This new product fits well with CVG and is also consistent with our corporate strategy to use CVG's comprehensive capabilities to diversify our product base and end-markets while at the same time utilizing forward thinking and technology to bring innovation to our industry and to our customers.

To recap the quarter, we remain focused on our strategy and vision to be continuing expanding our global footprint and product portfolio.

We also continue our efforts to increase market share in our global end-markets while maintaining a lean and flexible cost structure, as well as a solid and sustainable financial foundation.

At this point I'll turn the call over to Jeff for a financial review, and then we will walk through questions after that.

Thank you, Merv.

Our revenues for the past quarter were $237 million, which is an increase of $54.5 million or 30% from the first quarter of 2011.

This increase is primarily the result of our global OEM truck market revenues, which increased nearly (technical difficulty) $[4]3 million or 57% from the first quarter of 2011.

Our global OEM construction revenues were up modestly by a few million dollars or 3% from the same period last year, while our other end-markets collectively increased approximately $10 million.

This increase in our other end-markets was primarily related to strong orders from aftermarket and bus products, offset by slight decrease in our military market.

Operating income was $18.5 million or 7.8% of revenue, which is an improvement of approximately $10.4 million over the prior-year period.

Included in our cost of revenues in our first quarter of 2012 is a gain of approximately $865,000 related to the mark-to-market of our foreign exchange contracts.

Sequentially, revenues were up approximately $11.2 million from the fourth quarter of 2011, with an operating income increase of $2.4 million or 22% contribution margin.

As mentioned on our last earnings call we did expect approximately $1 million in cost headwinds from the timing of our annual wage increases and LTA givebacks in the first quarter.

Taking this impact into consideration, along with the gain for mark-to-market of our foreign exchange contracts, we are extremely pleased with our operating performance for the quarter.

Depreciation and amortization was $3.1 million, and capital spending was $3.4 million for the quarter.

Our interest expense was generally in line with what we discussed during the last conference call.

Tax provision for the quarter was better than expected, and is primarily related to tax expense for our foreign operations, while our US-based entities continue to be subject to valuation allowances.

Looking toward the balance of 2012 our estimate for tax provision at this time remains in the range of 15% of pretax income, as we continue to monitor the status of our valuation allowances as we progress through the year.

From a fully diluted EPS standpoint the quarter came in at $0.42, 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 $90.9 million.

This cash balance combined with our ABL revolver capacity means we have nearly $128 million of liquidity immediately available as we continue to look at strategic opportunities.

As we look to 2012, we are now providing guidance.

Our estimate for North American Class 8 units remain in the range of 280,000 to 290,000 units, and we currently expect our global OEM construction market to remain flat to up 5% from what we saw in the first quarter of 2012.

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

This is our 12th consecutive quarter of operating income improvement, when excluding impairment and restructuring charges.

This is something we are extremely proud of, and we look forward to continue our focus on operating and financial improvements as well as our long-term growth strategy as we move forward.

With that, we would like to open up the call for any questions you may have.

(Operator Instructions) Robert Kosowsky, Sidoti & Company.

Good morning, guys.

How are you doing?

So the $900,000 gain, that was included in cost of goods sold.

Is that correct?

That is correct.

Okay.

Then also, just Merv, what are you seeing as far as your production rates right now for truck?

Do you expect that to be taking a step down in the second quarter, maybe third quarter, just reflecting the weak orders that we have seen recently?

Well, you know, the weak orders so far hasn't translated into any of our production schedules showing a dip from our customers.

So we are retaining the same level.

What we are hearing from the predominant share of our major customers is that they are not going to be cutting back much on schedules.

You guys have done the conference call with most of them, and I think two of the three big ones are continuing at the build rate that they have had.

Okay.

Then also what are you seeing on the build side from a construction standpoint?

Do you see that ramping up from 1Q?

Well, we are seeing that it's -- that we are kind of holding it flat in North America.

We're understanding from China that we are starting to pick back up over there on both truck and on construction, so that seems like it is going to have a little bit of an uptick.

But in the US we are kind of staying pretty much flat with our projections.

Okay.

Then finally, could you talk in a little more detail about like the genesis of that Care4 strategy?

And like why -- just where that came from and what the ultimate opportunity is.

Well, it's a local business that started out, and it is really kind of revolutionizing the healthcare industry, that it is bringing a live doctor via video screen with actual medical devices available, which is really the difference between that and just videoconferencing a doctor in.

He has actually got high-tech medical devices in the station to be able to do.

We have seen all the announcements come out that really the truck driver profession is one of the highest health risks professions in the nation.

With already a shortage of truck drivers, we just feel like there is going to be a major emphasis being put in on that.

Plus when we look at our own factories, if we can set up -- especially larger factories, much larger than some of ours, can set up one of these stations inside the factory, where people can schedule their doctor's appointment before or after work, or during their lunch and breaks, it is going to take some stress off of absenteeism.

So we think it is a great future.

It took -- it allowed us to use up some capacity on some of our equipment that was not running at full capacity.

It's processes that we already had in place.

So it was like we continue to do.

It may be a process that is used on a grab armrest for a door panel for a semi truck; it might be a dash for a piece of construction equipment; and now it is making the big panels for a Care4 Station.

Okay.

Then just finally, what are you looking at for the pace of new product launches during the course of the year?

How much total incremental revenue do you think you're going to get from new products?

Well, we have got -- we don't get a lot of projection on what we are going to do on new products unless we are looking at aftermarket products.

This year, our goal is -- every year is to launch two new products.

Last year it was a floor mat and a new headliner.

This year, obviously the Care4 Station is one of the products that we have launched.

But we have also got a new high-tech flooring that is going into place, that is a foam in back flooring that will allow clearer logo emphasis.

I think we presented that at MATS and also at one of the construction shows in Vegas.

We have got a new over-molded wiring harness that is starting to take off.

We have got our new business venture that we are doing for Skoda in Europe that is taking off.

Our new compact seat which we just launched, we are starting to produce some in India, of a new compact seat for construction.

So we got a lot coming, but we always look on organic growth between 4% and 6% a year.

Okay.

Do you think that is going to hit kind of pro rata over the course of the year, that 4% to 6%?

Well, we have always hit between in those numbers.

I think last year it was even maybe up to 10%.

But that is the guidance we always give, between 4% and 6%; and we never really have fallen under that.

All right.

Sounds good.

Good luck with the rest of the year, Merv.

Thanks a lot.

Really appreciate it.

Ann, JPMorgan.

Hi, good morning, guys.

It's Ann Duignan.

Just a couple of follow-ups.

Could you delve a little bit deeper into your comments on China build rates beginning to pick up both on the truck side and the construction side, Merv?

What specifically are you seeing there on both end-markets?

Well, what we're hearing from the customers and then what we are seeing out of the Chinese government about what they are willing to talk about, I was just in Thailand last week.

Got back on Thursday a.m.

We are seeing an overall optimism level picking up.

We are seeing talk about the GDP growth coming back to a new level in India.

We just saw the rate cut on interest, which is one of the first in a number of years.

And the whole optimism in Asia is starting to pick back up.

The truck levels we're hearing from the customers, and as well as the construction levels that they are starting to pick back up and starting to ramp up.

They did not -- their goal is obviously to get back to the numbers that they were before, and they think that they will have a complete rebound by the second half of the year.

So would you characterize it more as they hope that things get better in the second half of the year at this point?

Rather than, gee, we are actually seeing evidence of a reacceleration?

No, we are starting to get information from our customers to -- that the ramp-up is starting and the schedules are starting to come back out.

They are fully expecting a recovery in the second half.

Is that specifically China construction and China truck, or is that emerging markets?

(technical difficulty) China construction and China truck.

But we are hearing out of India some pretty good things coming out of there, too.

Okay.

I appreciate the color.

Then, Merv, you seem to emphasize the fact that you have got $90 million in cash.

You've got capacity of about $128 million.

Is that -- should we be anticipating some announcement in the near term?

Ann, with us being made up about 18 countries -- or 18 companies, you should always anticipate, if we have got cash and we got markets that are taking off in the right direction.

Or either a slump in an area where we might be able to pick up something at a reasonable multiple, you know we are going to be buying.

And in that context, is there any specific area in terms of product area or region where you think the opportunities are greater?

Well, we think obviously that in Asia and -- we obviously, I think we announced it over a year ago, that we had signed an agreement with Volvo for Thailand and India for seats.

So we have got to be setting up some type of operation in those two countries.

Our emphasis will be on primarily Asia, because that is where we have got the biggest opportunity with brand-new customers to get into the market deeper, and deeper penetration with domestic Chinese manufacturers as well as the India manufacturers.

Brazil is high on our radar screen.

With some of the maybe -- I am not sure exactly the term to use for Europe.

It has been a little bit slower than in the past.

We hopefully will see some more things become available in that area at decent multiples that would be attractive to us.

So all of those things are on our radar screen.

At any given moment we have several that we are looking at.

Okay.

I appreciate the color.

I will get back in line.

I don't really have any more questions.

I thought it was a pretty clean quarter.

Thanks, guys.

David Leiker, Baird.

Hi, good morning.

It's actually Joe on the line for David.

Just some quick ones from me.

Could you just clarify what Bostrom contributed to revenues in the quarter?

Just a minute before we answer that.

Sure.

I will maybe just ask my next one.

With the military revenues not increasing and the commentary that FMTV production is actually moving up, I am just wondering if your content on that platform has changed, or if there's maybe mix issues going on that you are not seeing an increase in your Defense volumes.

I think on Defense what we are seeing, it has been slight decrease.

And we are not seeing with the ground transportation in Defense any large orders that's telling us that it's going to go back up over where it's at today.

We think if anything we will still maintain a slight decrease or pretty flat revenues from it.

Okay, great.

That's actually all I had.

I can follow up with Chad on the Bostrom.

Thanks, guys.

(Operator Instructions) Robert.

Merv, I was wondering if you could just give a sense of how efficient your operations are going right now through the plants.

Do you see more areas for improvement in margin expansion at the current production rates?

Or are you running pretty efficiently right now?

Well, if we are running real efficiently it has not been in any of the plants I have been in, so I think there is always opportunity for improvement.

Even when we have been running at what some of our guys would probably consider peak performance, walking through the plants we have been around this long enough to know that we will probably never be what this Group is content with, at running at peak performance.

So yes there's opportunities to get better.

Realizing that a lot of the workers that we have got, especially in the temp ranks were not here six months ago, so the efficiency improvements that you get from there.

Lines are just now ramping up maybe for a second shift, full second shift, so you pick up efficiencies there.

So no, we think there is definitely room for improvement.

When we go to the Asia facilities, one of our customers that we were bringing online, a domestic guy over there, they are doing some changing around.

I think there were some engine changes in Europe or in Asia that kind of happened like America, when the engine manufacturers may have been ready before the fuel manufacturers were.

So that has been affecting a little bit of China also.

So we think that will be picking up and that will help our efficiencies internal also.

Okay.

But you would expect on similar revenues, say, two, three, four quarters down the road you should have higher gross margins, just based upon the continual improvement that you do see?

Well, we shoot for that every quarter to have an improvement, and I think this is the 12th consecutive quarter that we have shown improvement.

Okay.

Was there any meaningful swing one way or the other from raw materials and maybe recapturing some of the previous price increases in the quarter?

Well, you know, we took a beating Q2 of last year because raw material increases weren't -- we said that they would be catching up in three months, and obviously they caught up in three months.

And like we said at that point, our raw materials anywhere run from usually 30 days to six months on the readjustment when we have changes come through.

But we are not right now seeing a whole lot of raw material swings.

I know there is one about the resin that has come out, but that is really not of any major impact to us.

All right.

Thank you very much.

(Operator Instructions)

Okay.

It shows no more questions.

Is that correct?

There are no more questions.

Okay.

We would really like to thank you guys for taking the time to join us today.

Obviously, we are extremely pleased with our quarter.

But we are probably even more proud that this is the 12th consecutive quarter that we have shown improvement.

It's a good string, and we continue to plan on adding to that string.

So, look forward to talking to you again next quarter if not before then.

Thank you.

Thank you.

Ladies and gentlemen, that concludes your conference call for today.

Thank you for joining us and you may now all disconnect.