Commercial Vehicle Group Inc (CVGI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Commercial Vehicle Group, Inc.

earnings conference call.

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

At this time, all participants are in a listen-only mode and we will conduct a question and answer session toward the end of this conference.

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

I would like to turn the call over to Mr. Chad Utrup.

Please go ahead.

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

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

Merv will then give a Company update and I'll take you through our results for the third quarter of 2012.

And then 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, tax positions and estimates, 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.

Thank you, Chad, and thanks to all of you who have joined our call today.

We'd also like to give a hopeful for -- that everyone of our investors, analysts and friends and just in general are safe on the East Coast from Sandy, Hurricane Sandy tragedy.

Then with that, I'll get into the call.

Earlier this year, we said that we thought the second half would be weaker than the first half.

Through the third quarter, this has been the case.

Based on replacement demand, however, we still believe the industry will finish 2012 with substantial Class 8 build around 275,000 to 280,000 units.

Although we think next year will start off slowly, we expect 2013 to be relatively good and have a build rate in the range of 250,000 to 260,000 units.

As we looked at the third quarter, our order flow was a little more erratic than usual as OEMs adjusted to softening orders.

In response, we began to manage our cost structure to help ensure we utilize our resources appropriately and mitigate any impact wherever possible.

This has historically been the pattern when OEM orders begin to soften and OEMs fluctuate their days of production.

Other end markets, including construction, also experienced some deterioration during the quarter.

Traditionally, our construction business has been stronger in the first half than in the second half.

Overall, the softening has not been limited to North America but has impacted Europe, China, and Asia as our global construction market orders declined nearly 20% from the prior quarter, a more severe decline than anyone expected.

Reports indicated the Chinese market continues to be tentative about growth rate.

But as we have previously said, we are a relatively newcomer in China, which is still a large and growing market for us.

We feel China offers significant opportunities for CVG as we continue to gain market share and new revenue streams from our products there.

During the quarter, we were pleased to announce that we were selected by JAC, a leading Chinese automobile and truck manufacturer, to supply seats for their new truck platform.

Under the contract, we will provide customized air suspension driver seats to JAC.

We expect production of the JAC seats to begin during the second quarter of 2013 at our Shanghai facility.

It should ramp up to full production over a 3-year period with the estimate of annual revenues of $12 million to $15 million at full production by 2016, '17.

Following several years of design and development, our GSX 3000 global seat was formally introduced to the European, Australian, and Asian markets at the IAA truck show in Hanover, Germany.

The GSX 3000 was designed by global engineering teams located in USA, United Kingdom, and China.

We have already begun supplying it to Foton Motors, a leading Chinese heavy truck manufacturer.

The customer reception to its European introduction at the IAA show was encouraging.

Going forward, we will continue to stay focused on our vision of expanding our global footprint, our product portfolio, and our customer base as outlined in our analyst day in September.

We believe our cash and balance sheet put us in excellent position to seek quality acquisitions and business development opportunities in India as well as other markets such as Brazil and Asia.

We would also consider a European acquisition if valuation multiples present an attractive opportunity.

In addition, we still expect to meet the 5-year goals discussed at our analyst day including the attainment of approximately $1.6 billion in total revenues for 2016.

We plan to achieve this through an additional $180 million in organic growth, $100 million from our plans to expand our business in Brazil and India, $200 million in new organic growth in China and $350 million additional revenues through acquisitions.

Other 2016 goals we announced include to have an at least 50% of our revenues comes from sources outside of North America, having no single end market represent more than 35% of our total revenues and having no single customer account for more than 20% of our total revenue base.

We remain confident that we have a team in place, along with the track record of international growth, to attain these targets.

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

Thanks, Merv.

Our revenues this past quarter were $204.8 million, which is a decrease of approximately $12 million or 6% from the third quarter of 2011.

This decrease is primarily the result of our global construction market revenues, which decreased approximately $7 million or 13% from the third quarter of 2011.

Our global OEM truck revenues were relatively flat from the same period last year, despite a moderate decline in Class 8 orders while our other end markets collectively decreased by approximately $5 million from the same period last year.

Sequentially, revenues were down approximately $38 million from the second quarter of 2012, primarily as a result of the decline in our global OEM truck revenues, which were down approximately $21 million or 17% from the prior quarter.

Global OEM construction revenues also declined approximately $12 million or 21% from the prior quarter while our other end markets collectively declined approximately $5 million from the prior quarter.

Compared to the second quarter of this year, our operating income decreased approximately $10 million on a $38 million decrease in revenues, which is a contribution margin of approximately 27% and generally in line with the high end range of our internal expectations of 20% to 25% on the sequential change in revenues.

Depreciation and amortization was $3.6 million and capital spending was $5.9 million for the quarter.

As I'm sure you saw during the third quarter, we released tax valuation allowances against certain domestic deferred tax assets.

This, in conjunction with tax expenses primarily in foreign jurisdiction, resulted in net tax benefit for the quarter of approximately $27 million.

The reason that these valuation allowances were released during this quarter is because we believe that these domestic deferred tax assets will be usable in the future.

We also continue to carry approximately $16 million of valuation allowances against deferred tax assets in some of our foreign jurisdictions.

We'll continue to monitor the ability to utilize these foreign deferred tax assets and, as appropriate, may release the valuation allowances placed against them.

From a tax rate perspective moving forward, barring any additional release of our foreign valuation allowance, we would expect our tax rate to be in the range of 15% for the fourth quarter of this year and a tax provision rate in the range of 30% to 35% for 2013 and forward.

From a fully diluted EPS standpoint, the quarter came in at $1.07, primarily driven by the unique tax benefit for the quarter.

As of the end of this past quarter, as you saw, we had approximately $99.5 million of cash on the balance sheet.

This cash combined with our ABL revolver capacity means we have nearly $137 million of liquidity immediately available as we continue to look at strategic opportunities.

As we mentioned over the last several quarters, we remain heavily focused on putting our cash to work in a proper manner, including organic growth opportunities as well as acquisitions both domestic and international.

While these types of activities can take some time, it is our main objective to insure we utilize our cash in the best manner, which may not always be the quickest manner possible.

As we look to the remainder of 2012, while we're not providing guidance, our estimates for North American Class 8 units is in the range of 55,000 to 60,000 units for the quarter.

While our global construction market was surprisingly strong through the first half of this year, this past quarter saw a rather sharp decline in medium to heavy equipment orders.

Currently, we expect our global OEM construction orders to further soften by approximately 10% from this past quarter, based on our estimates of customer orders and days of production for the fourth quarter.

To recap, we saw a softening in OEM truck orders on a global basis this past quarter as well as a similar decline in our global construction markets and a general softening in other key markets around the globe.

We believe we have utilized our variable cost structure by adjusting our costs with the demands of our markets.

We continue to focus on growth in all of our key markets through new business wins like those Merv mentioned earlier and on strategic acquisitions both domestic and international.

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

(Operator Instructions) Ann Duignan from JPMorgan.

Could you guys just talk a little bit about -- I don't think there's any surprise on the truck side.

I mean there's been so much talk about the orders as we went through the summer and so lower truck production and 55,000 units in Q4 is kind of consensus by now.

It sounded to me like maybe the global construction side was a little bit more of a surprise to you.

Can you just give us a little bit more color on that, Merv, and is that -- am I interpreting that right?

Then where exactly did the surprises happen?

It's not Caterpillar North America.

Yes, it was more of a surprise.

The percentage wise, especially the 20% and what we're seeing was more of it in Europe and Asia than what we expected.

We expected it to kind of remain flat or maybe down a couple points.

But to drop 20% was a real surprise to us.

In line with that, is that the reason why your inventories, days on hand, looked a bit higher than normal?

Yes, that is part of it and keep in mind we also did some new program launches in the middle of the quarter and we also had -- where we continue ramping up our plant in Mexico as well as transfer of some products to Mexico.

You always have to do inventory builds.

Whenever a customer takes out a week or -- out of the forecast or two or three days out of the forecast without any notice, you get caught with inventories coming in and inventories going out also.

So that ends up with a little bit of an increase.

So all those things put together is the reason for the inventories spiking up a little bit.

But much of it was in China and Europe with the reduction in the construction market was a big portion of it.

As you know, we manage inventories very well and this is something we're not real happy with.

But it will be taken care of.

Yes, totally I can appreciate when customers change their schedules.

It's not easy to react quickly.

So how should we think about then gross margins in the fourth quarter?

I think you said revenues would be down sequentially 10% on the construction side.

Will you have an opportunity to liquidate those inventories and have further under absorption?

I'm just trying to get a sense.

I know you don't guide to gross margins, but if you just could give us a sense of how we should think about it from a modeling perspective.

Yes, Ann, I think from our contribution, if we can talk contribution margin perspective.

I mean we're still going to stick with that 20% to 25%.

If you look at Q2 to Q3, it was kind of on the higher end of that range.

You had mentioned and Merv mentioned when you get days and weeks out, it's a little bit hard to take that out one for one in a short period.

So as we look at Q3 to Q4, we're really expecting to still be in that 20% to 25% range.

On the down side, it's going to be closer to that 25% range.

So that's still where we would expect it to be even with looking at global construction down another 10% and then we think the Class 8 is going to be in that 50,000 to 60,000 unit range for the quarter.

So we usually look at it on a year-over-year basis, so it's constructive to hear it -- look at it sequentially.

So thanks for that.

Then Merv, just one final one.

You mentioned that you'd be willing to make acquisitions in Europe.

Should we be concerned that acquisitions in Europe are going to look cheap because the environment is so terrible?

Maybe you get what you pay for or are there really some strategic assets over there that you think are worth looking at for the long term?

Well we think there's strategic assets over there looking at for the long term cause we were kind of looking at them before all the hits that they have taken recently.

It's still going to be -- continue in the future of the commercial vehicle world and the construction world, it's still going to be a big player as long as you've got the C&Hs, the Ivecos, Daimler and Volvo and DAF and guys like that over.

There's still going to be a very healthy market in comparison to any other market.

It usually runs a little bit more steady than many of the markets.

Right now, it's not.

But we don't buy cheap for cheap's sake or we would have already spent all of our money.

We've had a lot of really inexpensive deals come through or cheap deals I would prefer to say come through.

What we kind of shop for is the strategic fit and then if we can get the strategic fit, then we kind of look for the bargain in the strategic fit.

With the down market, we know that there's a lot of companies over there that are having cash flow problems.

We got three or four that we kind of got our eye on.

When the time is right, we're going to pounce on them.

We obviously, would help us in that market if we could pull off a seat acquisition and we know there's some of them that are struggling.

Interiors and heavy plastics are areas that we continuously scour the globe for, whether it be China, India, which is where our main focus is.

But if we can pick up a sideline deal that would grow our portfolio, grow our customer base, and grow our geographic footprint, we're going to be all over it.

That's helpful color and I appreciate the fact that you said you have looked at cheap and passed them by.

So, good to hear.

Okay, I'll get back in line in interest of fairness to the others.

David Leiker from Baird.

Chad, as we look at the fourth quarter versus third quarter contribution margin, should that degradation be a bit better than what we saw here in Q3 given the quickness of the schedules coming down?

Yes, that's kind of what I was saying.

I think if you look at Q2 to Q3, David, with the lag in some of the -- how rapid some of the orders were taken out in short notice.

It's a little bit to do a one-for-one drop in the costs.

So you typically end up closer to the 25% range.

So as we look at Q3 to Q4, we're still expecting a relatively decent drop in Class 8 and construction.

So, we're already working on plans to improve that detrimental contribution.

So we're still comfortable we're going to be in that 20%, 25% range.

Then follow-up on that topic.

Have you seen, granted an environment that the schedules are down here sequentially, have you at least seen the change in those schedules stabilize or is there still a lot of choppiness in exactly what those schedules are going to be for Q4?

Well, it depends upon the customer.

We've got one customer or two that may be losing market share and we have one that's picking up quite a bit of market share.

If you asked that one, they're going to tell you they're very optimistic about the fourth quarter and have taken out shutdown days that they had planned in November, December.

You talk to the other one and you've got a forecast where they're taking a week out here and a week out there.

So, that's the other thing that kind of hurts us just to be completely transparent on it is if you've got a factory that's running three customers and two of the customers -- none of the three ever take the same week down.

It's kind of like it's planned to not be down at the same time.

One will take the first week out.

One will take the last week out.

One won't take any weeks out, so you've got to -- trying to move your people around and cover just the amount of jobs, then the indirects you can't take out because it's hard to take out half a person.

So, that -- as good as we are at flexing labor and I think we may be one of the leaders in our industry at doing that, it's still difficult when you've got three customers or four customers in a factory and only one is running wide open, even overtime, and the other three are taking weeks out here and there.

Then shifting over to China here for a bit, you went in there several years ago, new participant in the market, picked up a lot of market share.

What have you seen your competitors do in the China market in response to your activities and the share gains that you've had?

Has anything happened there?

Well, frankly we've -- it's been kind of I guess a surprise to see how -- we are very flexible.

I'd just lay it out there.

We're very flexible.

We're very accommodating when it comes to designing product that they would like and the method and delivering it in the method that they want and we're responsive.

We have a team -- we've put a team in place which I think you've even been over in and to meet and I think Ann has.

Several of the analysts have been over and met the team that we have there.

It's not like they have to call here to get an answer.

We do it there.

We've got a design center there.

We've got an R&D center there.

So it's not like we're trying to do business with them from North America or Europe.

We're actually Johnny on the Spot, so to speak.

So if there's any issues, we're in some cases 15 minutes away, in some cases 4 hours away.

But we're in the same time zone and we're reacted to it and proactive in most all cases.

They really appreciate that we're not trying to manage the business from a different continent.

So if you look at those other suppliers there, you continue to take market share.

Are they responding with cutting prices or are they redesigning their products or are they taking capacity out?

They're taking capacity out is what we're seeing.

The other good part about it is too is that they're looking for a brand name that is pretty well known.

The CVG brand has become a very well known brand throughout Asia.

Obviously, when you're looking to export vehicles, you may not have a brand name on the front of your truck that they recognize.

So it's good to have at least some brand names inside the truck that's recognizable.

Have both competitors that you have over there on the construction side as you move and expand your efforts on the truck side, are those the same players or are they different?

Is there a difference there?

Some of them are different.

Our construction brand is really one of the best brands and we think is the best brand in the world.

Obviously, we have a lot of customers that think so also.

So that's really what got our foot in the door in Asia was our construction seats.

In 2005, I think we transferred from Europe about $4 million worth of business over there.

Today, it's what, $75 million this year, run rate, something like that.

As we showed in 2016, we're at a $250 million or so run rate.

So it's -- some of it we're taking out local small mom and pop shops and that can't compete with an international company on design capabilities and engineering talent.

Our engineering talent is local.

Like I said, it's not on different continent and we haven't seen our competitors, our foreign competitors, foreign turned domestic over in China like we have done put in the infrastructure inside of China.

They've tried to do it from other parts of the world.

Frankly, that drives our overhead rates up a little bit higher in our Company but it wins us the business and allows us to do the growth that we need.

Just one last item here for you, Chad.

You've done a great job over the last several years on the balance sheet and strengthening that.

With where the -- that your capital structure is today on the cash, is there a point in time where share repurchase starts to make sense for you?

No, I think Merv talked about the top priority for us just from a strategic perspective is not only organic growth but acquisitions.

So at this point, David, we're still -- have that as our top priority.

We do have a lot of things that we're looking at and always have.

Merv touched on Europe earlier.

We're continuing to pound the pavement and look for opportunities in Asia in general but in India, China, and Brazil.

So that really, as we sit here today, is still our top priority.

David, it is something that we think about and we do look at.

But frankly our stock is so thinly traded now, there's not much float out there.

We're still averaging 100,000 and some thousand shares a day.

On a down day, it's -- we had somebody I think dumped a million shares a month or two ago and they were snapped up in two blocks or something like that.

So it's -- that is one of the things that we see as an issue with our stock is it is so thinly traded.

At these prices, it's getting snapped up almost quicker than it can get out on the table.

We think that might cause a problem if we bought up shares.

But it is something that we deal with a lot.

We look at everything.

We've got the cash here so we look at all different things, downturns, stock buybacks, debt buyback, just a lot of different things.

Robert Kosowsky from Sidoti.

Yes, just had a quick question.

I mean the last time revenue was this kind of 200 -- I guess 2Q '11 revenue was $206 million and SG&A was $16 million back then.

Now it's running at $17.5 million and it was down about $1 million versus 2Q.

I'm wondering what your thoughts are on SG&A over the next few quarters as you deal with this weak production environment?

I'm going to take this one from Chad for a second and at least start into it.

I think I kind of touched on it with the question that David asked about how we're taking business in China and places like that.

One of the things is we've had to put in extra overhead to have an R&D center in China so that the Chinese customers don't have to try to come to North America or to Europe to get their products launched or started launching and designed and tested.

So that's increased our overhead.

We now have put factories in Mexico to supply our customers down there, primarily Daimler and some with Navistar and we have won a couple new customers down there.

So we've got new factories that we didn't have in the past.

We've expanded in Czech Republic to take on the -- put in a new place there to take on the Skoda business, which has required more talent to be put in.

As we bought the company in Australia, that's new businesses that we continue to have to -- as we try to grow Australia, overhead increases.

As we have moved into India, we're putting in new people to be able to cover new business that we're looking -- that we've won there.

So there is some growth of overhead through needing to be able to manage the new markets that we're in.

If we were just totally in the US, then we could certainly -- we would take out overhead as it comes -- as the market drops significantly here.

But when it's like that, as you're growing at the same time, it makes it a little bit more difficult.

What would you need to see from just an end market standpoint in order to pull back on some of those growth investments?

Well, we probably won't pull back on the growth investments in Asia because the US market's down.

Like Chad said earlier or I said one it China and India are growth markets for us because we've gone in there with no business.

So because the US and Europe being down, we can't pull back or we would -- our revenues would be like they were at one point down to 400 and some million versus $1 billion or $900 million.

Yes, Rob, to add on that.

Merv's right.

I mean as you guys know the investment that you have to put into the operation comes well before any new business achievements.

I think over the last couple years what we've -- what you've seen in our SG&A is just a portion of that.

But Merv talked earlier about the development of the GSX 3000.

We've been working on that for at least over a year.

So there's costs like that that you have to do well in advance of new business.

I think the fruit from that is the new business wins that you -- that everybody's seen from us over the last couple years in terms of Nissan Diesel or UD, Foton, JAC.

Those are all the China operations.

But there's also some content wins and other new business achievements that we've announced over the couple of years.

Volvo.

Volvo and XCMG, Daimler.

All those things are a result of us putting the investment and the resources and the technology in place way ahead of the actual revenues coming down the line.

Skoda's another one.

So those are just a few examples.

To look at what we said for our 5-year plan, we're fully marching ahead in terms of achieving our 5-year target of $1.6 billion.

So what we're putting in place today may not be popular from a quarter-to-quarter perspective because it's just viewed as adding costs.

But it's absolutely critical that we continue to invest that way if we're going to achieve those five-year targets.

Any comments on the pace of new product launches?

Is there any kind of weakness that we're seeing in production markets?

Is that pushing out some of the new content wins you're going to be getting over the next few years?

Is that pushing that back in this year?

Like for Foton, is that still on track and kind of just your thoughts about that going forward into 2013?

Well, Foton and any of the business that are new models platforms also in Asia, they experienced the same issues that we had in North America on the trucks were -- the engines were ready before the fuel is ready.

So, there has been a slowing of that.

Investment wise, we're still seeing pretty strong investments inside of China itself being put into new products to improving the product lines.

India, which we see as a strong growth market for us, we still see that as really probably more of a radical change there.

All of sudden now that truck drivers are becoming important to the India market instead of just going -- we don't want a comfortable seat because we don't want them falling asleep.

That was one of the OEMs comments at one point two years ago.

Now all of a sudden that same OEM is going, we really, really need to start improving the quality of the interiors of our cabs as well as the exteriors.

So we're seeing growth -- a change in the market wanting better technology in countries like India and China made that move a few years ago, probably started it in '05 and '06.

So, we're seeing now countries like India.

We're seeing even Brazilian markets starting to want an improvement in technology.

Any kind of thoughts about the construction market into 2013?

Yes, I think, Rob, if you look at year over year considering how high the first half of this year, 2012, was.

We're looking at anywhere from flat to down 5% globally from full year 2012 to full year 2013.

Taking the high run rates we had in the first half and what we're expecting in the last half of this year, we probably see North America down a little bit more than where we see the rest of the world from a construction market perspective.

But if you look at our global construction market, we're anywhere between flat to down 5% globally.

(Operator Instructions) [Pradeep Caw Corell].

I just wanted to see how comfortable you guys are paying 8% on your notes and what the plans are as far as refinancing?

I know like other companies in your industry have been refinancing their debt to get a lot lower interest rate in this interest rate environment.

So just wanted to see what you guys are doing on that.

Also, since you're not considering a share buyback, would you consider a one-time distribution or anything in the future?

I know you have big acquisition plans, but considering track record with the Czech facility a few years back and shutting that down and bringing it back up.

Are you planning on doing anything to get the stock moving again?

Well, let's start from the back side of it.

I'm not sure what Czech facility that we shut down then restarted back up because we've not done anything like that.

We've built a new facility in the Czech Republic and closed another one, but we never at any time phased it down and restarted it.

As far as 8% notes, our notes are, what Chad?

7 7/8.

7 7/8 and they are due in 2019.

So there would be -- and they're trading pretty much at par.

So, at this time, it would not make any sense to refinance that.

Chad?

Yes, those notes were put in place in April of last year, so about 18 months ago.

So we do look at things like that where it makes sense.

I think Merv mentioned earlier a number of things that we consider.

We consider all of our options from a partial debt repayment to -- we don't think a complete redo of our debt structure makes sense.

We just put in place in April of last year.

The rate is pretty good.

It's not due until 2019 and currently it would come with a prepayment penalty.

So when you put all those things together, it doesn't make sense for us to look at that.

We do look at things as share buybacks as Merv mentioned and also mentioned some concerns.

So we look at a number of things, Pradeep.

Right now, as we sit here today, as I mentioned earlier, the top of our priority right now is still investing in organic growth and acquisition opportunities.

I think we laid out pretty clearly our five-year plan and acquisitions is a key part of that.

So we want to keep an eye on that and make sure that what we do from a capital perceptive lines up exactly with what our five-year plan is.

I would now like to turn the call over to Merv Dunn for closing remarks.

Again, thank all of you for calling in and we know that a lot of you have gone through a lot of trauma with the Hurricane Sandy and we certainly have been concerned for you.

We also are very high on our Company.

We're very -- have adjusted down where possible with the downturn in the market and we still are on track with our strategic plan and still on track with the 2016 goals that we laid out for the analyst day that we had in New York.

Thank you again for joining the call.

Chad, any?

Thank you, everybody.

Appreciate your time and look forward to speaking with everybody again next quarter.

Thank you.

Thank you for joining today's conference.

This concludes your presentation.

You may now disconnect and good day.