Commercial Vehicle Group Inc (CVGI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the First Quarter 2013 Commercial Vehicle Group Earnings Conference Call.

My name is Dave.

I will be your operator today.

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

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

(Operator Instructions)

As a reminder, the call is being recorded for replay purposes.

Now I'd like to turn the call over to Mr. Chad Utrup, Chief Financial Officer.

Please proceed, sir.

Thank you, Dave.

Thanks everybody for joining the call today.

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

Merv will then give a brief Company update and I'll take you through our results for the first quarter of 2013 and then at the end we will take time for 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, 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 for joining the call.

From an end market standpoint, our first quarter played out as expected and [it was] basically uneventful.

As we projected, business volumes in the first quarter of 2013 ended up very similar to the fourth quarter of 2012 and in fact were down slightly from a build perspective.

We continue to believe we will see a sequential uptick in Class 8 build rates from Q1 to the second quarter in the second half of 2013.

Our 2013 estimates for North America Class 8 build remains in the range of [250,000 to 260,000] units.

As indicated in our last earnings call, we felt that the weakness in construction market would linger for another quarter or so and then begin to pick up through the second half of 2013.

This too -- prediction as construction revenues remained relatively flat in the fourth quarter of last year continued.

We think the global construction markets will be strong over the coming years but are currently experiencing short-term softness due to the need to deplete excess inventories.

Our military, aftermarket and OEM service orders showed a little improvement during the period compared to the fourth quarter of 2012.

The closure plan for our Statesville, North Carolina facility continues on schedule and is expected to be completed by the end of this quarter.

The products made there will be absorbed into other CVG facilities.

We expect to see approximately $2 million to $3 million in savings from this consolidation effort for the full year 2013.

Also as a cost savings measure, we are continuing to operate with reduced labor force.

As anticipated, our overall cost control efforts improved our financial performance in the first quarter compared to the last quarter of 2012.

Although this is not where we would like to be due to weaker market conditions and current capacity gaps, we are continuing to focus on short-term cost-control efforts.

We are doing this while ensuring that our facilities and our staffing are prepared for the anticipated ramp of our end markets in the coming quarters.

We are also working to ensure our initiatives for the CVG's long-term growth are not cut short.

Our two acquisitions made at the end of the fourth quarter of 2012 are in effect for the first full quarter with CVG.

Our Daltek acquisition remains on track to meet our expectations for the year.

However similar to our end markets in North America and China, softening in the India market is having an impact on our new JV -- I'm sorry, on new acquisition [Vijay Seating] in India.

In terms of new business, I am pleased to report that we have been awarded a new contract to supply seating to Caterpillar's Building Construction Products Division.

These seats will be used in smaller wheel loaders, small tracked tractors and mini-hydraulic excavators.

We will produce them at our National Seating facility in Vonore, Tennessee with production expected to begin in the third quarter of this year.

Initial production under this agreement will support Caterpillar's facilities in North and South America.

This new business award fits perfectly into the diversification and growth strategies we have set for CVG by expanding our market penetration for construction seating in North America.

Lastly, at the beginning of March I announced my plans to retire from CVG in 2013.

I am pleased to have been the Founder and CEO of CVG for so many years, [but] while here assembled a great management team that globalized and grew this Company.

Although I will miss CVG, it is a great Company and will be 99.99% the same after I leave.

As you know, one person does not make a company.

I have no doubt that we will find a strong leader to fill my shoes and take CVG onto its next phase of growth and global success for years to come.

In summary, I want to repeat that we believe the current market weakness is short term and that we plan to continue to following our five-year growth plan.

I want to assure you that our team remains focused on long-term corporate strategy to expand our global footprint, broaden our product portfolio and grow our customer base.

That means we will continue to invest in this search for strategic acquisitions and other growth opportunities.

We will also keep our focus on growth through new business wins and target 4% to 6% organic growth or better in 2013 and beyond.

In addition to a great management team, our cash position and balance sheet offer us an excellent opportunity to do that on a global basis.

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

Thanks, Merv.

As Merv did indicate the first quarter of 2013 was rather uneventful from a market standpoint.

On our fourth-quarter earnings call in February, we indicated that we expected the first quarter Class 8 market to be up slightly from the fourth quarter and that we thought the global construction market would be relatively flat to the fourth quarter.

As it turns out, our estimates were fairly accurate, although Class 8 production was down slightly versus the fourth quarter of last year.

From an end market perspective, our first quarter looked quite similar to the fourth quarter of last year with the exception of our two acquisitions.

Looking at the first quarter of 2013, our revenues were $177.8 million which is a decrease of $59.2 million or 25% from the first quarter of 2012.

Our OEM truck revenues declined approximately $41.7 million or 34% versus the first quarter of last year.

We also saw a decline in our global construction market revenues versus a year ago of approximately $16 million or 30%.

Collectively our other end markets including bus, ag, military and aftermarket declined from Q1 of last year nearly $7 million or 11%.

These market declines were moderately offset by incremental acquisition-based revenue of over $5 million, which was also down slightly from our expected levels due to weaker market conditions.

On a sequential basis, compared to the fourth quarter of 2012, our revenues increased approximately $4.5 million.

This increase is primarily related to the incremental revenues from our acquisitions.

Our OEM truck revenues declined modestly by $2 million on a sequential basis and we're generally in line with build level changes and our construction revenues were relatively flat.

The moderate decline in truck revenues was offset by slight improvements in our aftermarket, recreational and other end markets.

Overall, again, Q4 to Q1 was fairly flat, other than the incremental revenues from acquisitions.

Operating loss for the first quarter was $273,000 compared to a loss of $2.3 million in the fourth quarter, an improvement of approximately $2 million on essentially flat market and revenue conditions.

This improvement is the result of our focus on reducing costs and utilizing our variable cost structure and we are pleased with our improvement when compared to the fourth quarter of last year.

Depreciation and amortization was $4.3 million and capital spending was approximately $4.5 million for the quarter.

Our effective tax rate for the quarter was 18%.

And as you can see, the rate differential to a more normalized rate is not indicative of a substantial impact from a dollar value perspective.

As we look towards the balance of the year, we may continue to see these fluctuations in our tax rate depending on how our end markets and earnings impact our foreign operations as we do not record tax benefits where we have valuation allowances in those regions.

Based on our current outlook for a gradual ramp in our end markets through the balance of the year, we currently expect a higher tax rate in the second quarter and a more normalized rate of, say, between 35% and 40% for the second half of the year based on our current outlook.

From a fully diluted EPS standpoint, the quarter came in at a loss of $0.16.

As of the end of this past quarter, we had a cash balance of approximately $65.3 million.

This cash balance, combined with our AVL revolver capacity means we have over $100 million of liquidity available as we continue to look at strategic opportunities as Merv mentioned.

Looking at the full-year 2013, our estimates for North American Class 8 remains in the range of [250 to 260,000] units and our expectation for our global construction market remains flat to down 5% year-over-year.

We continue to believe our key end markets will rebound gradually through the balance of the year.

In closing, we'd like to remind everyone that our end markets obviously do fluctuate.

Because we have experience in these market fluctuations, we align our cost structure to be able to navigate through these swings.

That does not mean that our margins remain stable or flat through the peaks and valleys but that we have the ability to manage through the swings over the long haul.

We understand the swings are inevitable and some may be deeper and some may be longer than we would like, but we continue to focus on adjusting our costs and targeting diversified growth to minimize the impact on the downside and maximize profit potential on the upside.

Right now we believe we are coming out of a low period for our key markets.

We believe Class 8 has room for improvement and that global construction build rates will see upside through the balance of the year as well.

Although our markets and margins are not currently where we would like them, we continue to stay the course through these swings and we are very excited as we look towards the balance of 2013 and beyond.

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

(Operator Instructions) Ann Duignan, JP Morgan.

Hi, there.

It's Mike Shlisky filling in for Ann.

Good morning.

Hi, Mike.

Hey, Merv.

Best of luck to you, but I just wanted to ask if you guys have any sort of update on maybe your search for a new CEO of CVGI, anything we can learn there?

Basically [we have] three strong internal candidates and we have a few external candidates that are going through the interview process currently and looks like we're going to have a very strong field to choose from.

That's great to hear.

Then moving onto your North American truck outlook, I mean you guys mentioned a pickup in build rates in Q2 and going forward, but I do know you guys have a bit of a reduced workforce.

I was wondering if you can maybe just share with us your plan for how you can ramp production with fewer people to help you do so?

Well, part of our historical way we manage our Company is when we go through a downturn the first thing we do is take out overtime, that's immediate.

Second thing we do is take out temps, which is a little bit slower process.

And so when we start back up, the first thing we do, when we see a ramp-up coming till we field it out if it's going to be a long-term or a longer-term ramp up, is we start with our overtime.

And then when we run a few weeks and we see that it's not going to be just a few weeks up and drop back down again, which our markets can do, is we start adding -- bringing in temps and start the training process with them.

And then we slowly build up to where we level out the overtime a little bit and run with temps and overtime to a lesser degree on overtime.

And then when we start back down then we -- first thing we do is take out the overtime and back down like I discussed.

Yes, I think to add to that, Mike, that Merv is exactly right.

So what you are talking about is, if we are thinking of [let's say], just for example is in the [250,000 to 260,000] range and we had 55,000 units in the first quarter, you are talking about maybe a 15% to 20% uptick from Q1 into run rates through the balance of the year.

So, just to put it in perspective, if you have got 10% temp and 10% overtime, it doesn't equate to needing to double the size of the workforce to meet the demands.

Got it.

Got it.

That makes sense.

And then finally, the Cat contract, it sounds like some of this is new products that you haven't worked with before.

But I was wondering if you can give us [some kind of a] view on just how much -- how big that contract is just so we can sort of get our [model estimate] as to what might be growth beyond just the market growth.

Well, we can do half of that for you.

It is products that are new to the US market for us and overall new to our Company in this particular product line.

But the technology is not new technology to us.

It's existing technology and what it's doing is strengthening the North America product portfolio as well as customer base for seats because I think one thing that's been about our Company is we have been -- on seating, we have been very concentrated in North America Class 8 market.

And so, one of the things that we have done is focus very much on trying to expand that marketplace in North America to construction seats as well as ag and things like that.

And this is our first really good nice contract in North America for construction in forestry type seats.

Then obviously our goal is to move into the rest of the world with the Class 8 seats which we have done a really good job of into the Asia market, including Japan and China.

Okay.

Well, thanks so much.

Thank you, Mike.

David Leiker, Baird.

Good morning, everyone.

Good morning, David.

Good morning, David.

Merv, I was wondering if you could give some insights in China both the truck and at the construction side hearing varying words, Komatsu is out today saying that they are going to increase production in China, Volvo on the other hand, is sitting there saying there is no sign of recovery.

Do you have any insights into what's going on in the construction side and then on the truck side where you are in launching your programs there?

I just read the Komatsu statement right before you guys came online and I was kind of -- we are not seeing that yet.

They are leading us a little bit faster than what we are seeing the turnaround.

We are still seeing excess inventories being burn off and I think it will for a little while.

The one thing that I saw that was kind of interesting that I have not -- that I just read yesterday was the lessening of -- I am sorry -- the changing of some political stances in India which is opening up the mining which -- so there are some growth that we are seeing that or we are hearing that's going to start coming in mining where they are lessening up some rules and regulations to allow the mining to pick back up in India.

So that side of the business, the mining, I am hoping that's going to develop into more revenue dollars for us again on that side which also would increase the bus market over there which helps our Vijay Seating that we just talked about.

But as far as China and construction, they're seeing something I am not seeing at all any signs of yet.

And I forgot the last part of your question.

An update on where you are on the truck side, launching seats in the truck market in China.

I think the one piece of business you have is pushed out a little bit, right?

Yes.

And that's one thing I did want to talk about a little bit.

When we announce these programs and that's sometimes the reason we are a little hesitant about giving a dollar number, is sometimes they get layered into models like it's a $60 million program, $15 million a quarter, and it just doesn't happen that way.

But what we are still seeing is a slowing of the Class 8 market over there.

We still have not seen that pick back up to any kind of levels that would increase our build and it's just still kind of pushed out a little bit on the business awards that we talked about in China.

So we're still not seeing the guys you need to do everything you can to pull this launch forward.

It's still being -- they are still -- got the stiff-arm type thing about taking product right now.

Great.

And then just one last item here maybe Chad, as you look at the military business with FMTV going end of life here in the second half of the year.

When does that start to impact your number and how much of an impact do you think that has?

Yes, we are in our third consecutive quarter of military decline, David, so I think we're in the midst of that.

Now, military is still not big.

It's $5.5 million in revenue for us in Q1.

So it's not significant in the scheme of things, but we do see that continuing to taper off through the balance of the year.

And then lastly, Merv, best wishes from me.

I know we'll stay in touch there, okay.

Absolutely.

Thanks, David and thanks to all you guys there that have shown so much support over the years.

Absolutely.

You take care.

Okay.

Robert Kosowsky at Sidoti.

Hi.

Good morning, guys.

How are you doing?

Hey, Rob.

Good morning.

I was wondering, Chad do you have any idea what the market outgrowth might be this year as a percent of sales?

It may be kind of -- is it going to be a little bit more aggressive into 2014 now that you -- maybe you get Photon orders coming though a little bit more so?

Yes.

I think there is two ways to look at that.

Great question.

There is two ways to look at that.

One is I know some people on the call they look at it from in terms of percentage of when it's awarded and how much that value is worth, but what we really need to look at is when it actually gets into production, so when it actually becomes a financial impact.

So we are still targeting that 4% to 6% this year, Rob.

I would tell you it's probably going to be on the lower side of that.

And exactly to your point as we get into later this year in some of those SOP dates come into play and really start to impact 2014, we would expect to then to see a much higher number than the typical range that we give.

So we are still looking at that 4% to 6% range because we are targeting things in aftermarket growth.

And we are targeting things in bus and India side of thing.

So we are still targeting that level but when you have program like Photon, some of these larger ones that get pushed out say six months or nine months, it can certainly have an impact on that as a percentage of market outgrowth.

Okay.

That's helpful.

And then I guess as the quarter progress how did you see, I guess, monthly revenue, North America truck, did you see it step up with build rates and what happened on the construction side as well?

Honestly when we talked with everybody on the call two months ago, taking aside the monthly progression question, I mean, we basically put out there to everybody we thought truck would be relatively flat, maybe up a little bit and we thought construction will be flat.

And so i.e., the best way to read into that is top line is probably going to be flat and that's exactly what happened.

So our revenues throughout the period without having the exact numbers in front of me, Rob, they track pretty well to the build rates.

And our internal tracking does, aside from some swings with market shares, let's say, [MAC] who may have a larger content for us.

It generally tracks with what you see in the build rates that come out and get published.

And construction, really no change.

I mean, it's just -- China has been way down, India has been down for us and North America has been down from where we expected, say, six months ago.

So it's been relatively flat throughout the period.

Okay.

But would you expect to see constructions start to step up in the second quarter based up on what CAT was saying earlier this week?

Yes, our current expectation is that through the next, say, quarter -- second quarter, we will see a gradual ramp and then the last half of the year.

As we sit here today we think it's going to be pretty strong in terms of new build production for both truck and construction.

Nothing major to speak of right now for short term but as we look through say the second half of the year, we kind of see it gradually building up in both of those markets.

Okay.

And then I guess just one last question, I know -- I appreciate the fact that you think that the market downturn right now is transient, temporary and we are starting to see signs of life from some of your customers.

But I'm just wondering, if you needed to, where do you think you could bring breakeven down to on the Company if it was kind of a bad economic environment you needed to really turn the screws on cutting cost?

Well, I think the best way to answer that is is in two parts.

One is, let's look at Q4 to Q1 without acquisitions.

Sales were flat and we improved the bottom line $2 million.

Now some of that's FX and some of it's this and that but we improved to $2 million.

And what Merv mentioned earlier, we mentioned on the last call is, we are already in the process of closing and consolidating our North Carolina facility.

We expect $2 million to $3 million of savings from that.

So what you are really talking about is a little bit of overhead and some capacity reductions which obviously don't happen overnight but they are already in process.

So there is several things that we can and are doing.

And I think all you have to do is look at Q4 to Q1 to see the impact of that and look at what we are planning on already for the balance of this year.

Okay.

Thank you very much.

Thanks, Rob.

Thank you very much.

There are no further questions for you gentlemen.

So I would like to turn the call back over to Mr. Merv Dunn for closing remarks.

Guys, you all really let us off easy today.

Thank you.

Either we are getting clear about describing our process or something.

Anyway really, really want to thank all of you for taking your time this morning to call in.

And thanks for the ride and appreciate all of the fun we have had with everything.

So Chad will be here to carry things on.

Take it over Chad.

Thanks, guys.

I appreciate it.

Obviously if you have questions, John Hyre is the right guy to get hold off, be happy to talk for anything you need.

Thank you for joining today.

Bye.

Thank you both gentlemen.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a very good day.