Commercial Vehicle Group Inc (CVGI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 Commercial Vehicle Group, Inc., earnings conference call.

My name is Tahitia and I will 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, Tahitia, and thanks, everybody, for joining us on the call today.

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

Rich will then give a brief Company update, and I will take you through our results for the second quarter of 2013, and at the end we will take time to answer questions.

With that I would 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.

And with that I will turn the call over to Rich.

Thanks, Chad, and thanks to everybody who joined us online today.

I am happy to be able to speak with you today, and I look forward to getting to know many of you better as we talk about our results and our plans going forward.

Even though I've only been with CVG for two months, I would like to take some time today to speak about the past quarter, and then talk to you about my thoughts and our outlook for our key end markets and what I believe to be significant opportunities as we forecast the next three years for CVG.

Our second quarter really held no surprises from an end-market perspective.

The North American Class 8 production levels were approximately 67,000 units, and our outlook for the full year is approximately 250,000 to 255,000 units, meaning we don't expect much additional uptick from the Q2 run rate over the last two quarters of the year.

We did see approximately 12,000 additional units in Q2 over the run rates of the prior two quarters, which is reflected in our top-line sales.

Our global construction market revenue in Q2 also saw an increase of approximately 8.5% relative to the first quarter of this year.

And our bus, military, aftermarket, and OEM services and other markets collectively also increased by about 7% from the first quarter of this year.

Overall, these end-market increases contributed to a 12% revenue increase on a sequential basis over the first quarter.

Our expectation of a strong construction recovery in the second half of this year remains the largest at-risk end market in our view.

Although we did see an uptick in Q2 over Q1, the prevailing concerns over inventory overhang and, specifically, the immediate construction market recovery in China is a major focus for us as we look at the back half of 2013 and into 2014.

We believe the overhang situation in China has improved, particularly with the MNC manufacturers, and we see more normal production rates going forward in China.

Our current expectation for the global construction market is that the second half of this year may see a 10% uptick over the run rate of the past quarter, with heavier weighting towards the end of the year.

We continue to remain in close contact with our customer base; and while the rebound seems to be longer awaited than originally anticipated, we do believe that demand is on the rise.

As well, I believe that the construction industry presents the single largest growth opportunity for CVG over the next several years.

As you may know, my pre-CVG career was in the global construction equipment industry, and I spent a good part of my career living and working in Asia.

As we work our growth plans going forward, we will focus on the construction equipment industry globally and with a keen focus on China and the rest of Asia.

The Company has established a solid base of operations in China, and I expect to see increasing demand for our products across Asia as the buildout of infrastructure and transportation in that part of the world continues.

Since I have been onboard over the past eight weeks, I have visited a number of our facilities and have had a great introduction to our products, our processes, and our people.

I have gained a very positive impression of the manufacturing expertise in our facilities and the emphasis that is placed on safety, quality, and employee involvement.

I have also gained an appreciation for the customer relationships within CVG.

Having been on the OEM side for many years with Caterpillar, I can tell you that CVG is a well-respected company with a strong reputation for safety, cost, quality, and delivery.

As many of you know, CVG has been built in part through acquisitions over the years.

While the M&A market is not quite as robust as it has been in the past, I believe that M&A has a role in our growth and diversification objectives going forward.

We will continue to be in the market, and we will be opportunistic as we assess the market.

However, I want to emphasize that CVG is in an excellent position to realize significant expansion through organic growth.

With that in mind, we will stay sharply focused on developing product programs that will help us more effectively create value for our customers, build new customer relationships, and invest to meet the needs of our growing customer base.

Our goal is to continue to reinforce a strong value differentiation in our products, our manufacturing base, and our sales and service efforts.

I would like to offer a couple of examples.

During the past quarter, our Bostrom Seating brand introduced a new line of truck mattresses that feature industry-leading Serta technology.

Serta is the number-one mattress manufacturer in the United States.

Bostrom and Serta teams worked together to create a unique product offering that combines the strength of two premier companies known for comfort and quality.

In June, we were honored with the Hino Motors USA's Excellence in Value Improvement Award.

Hino is a well-recognized, high-quality brand that CVG has provided Class 6 and 7 truck seats to since 2011.

This award recognizes CVG's proactive and ongoing collaboration with Hino to increase product value and address cost challenges.

Finally, during the quarter our electrical systems facility in Edgewood, Iowa, achieved Platinum status under Caterpillar's Supplier Quality Excellence Process program.

This is the second year in a row the Edgewood facility has received this honor.

To earn the Platinum designation, the team had to deliver near-flawless execution and customer satisfaction.

We salute CVG's Edgewood employees for earning Caterpillar's highest Supplier Quality Excellence Process rating twice in a row.

These examples of new product introductions, manufacturing excellence, and customer collaboration are prime examples of what we must continue to reinforce and expand upon.

It is my goal to continue with the progress CVG has made over the years and push us towards industry leadership in areas such as manufacturing excellence, product offerings, quality, and shareholder returns.

In summary, our end markets remain challenged; and as a result our operating margins remain under pressure.

As you know, CVG has a highly variable cost structure, which allows us to flex up and down with the demands of our end markets.

That said, we remain focused on the improvement of that margin pressure even during weaker markets such as we are experiencing today.

In response to this dynamic, we are focused on several key areas going forward, including short- and long-term growth objectives, primarily organic opportunities.

In other words, leveraging the assets and products we have in place today.

We're also going to be focusing on M&A which may arise as we continue to focus on global expansion and diversification.

Second, ongoing evaluation of our manufacturing footprint and efficient use of our assets.

Our objective, to be clear, is to rationalize our global footprint to enable more efficient utilization at current production run rates while maintaining our ability to respond to peak run rates.

We fully expect global construction equipment and truck markets to recover.

Number three, new product development, introduction, and product cost.

We have got to be focused on introducing products that add value to our customers going forward, meaning that features and cost have got to be aligned with customer expectation.

Number four, capitalizing on the strong opportunities which I believe exist in the global construction end market.

And along those lines, number five, expanding market share in China and India.

Although Asian markets are not as robust as they were several years ago, CVG's opportunities for expansion there with existing and new customers are attractive.

In closing I would like to reiterate how excited I am to be onboard with CVG and how optimistic I am for the opportunities in front of us over the next several years.

I look forward to continuing to build on the foundation that was set before my arrival, and I look forward to meeting with many of you as we move ahead with our plans.

At this point I would like to turn it over to Chad for a financial review.

Thanks, Rich.

As Rich indicated, the second quarter of 2013 really held no surprises from a market standpoint.

On our last earnings call we indicated that we expected the Class 8 market to be up sequentially from the first quarter and that we thought the global construction market would begin to see an uptick into the second quarter.

Looking at the second quarter of 2013, our revenues were $198.9 million, which is a decrease of $43.8 million or 18% from the second quarter of 2012.

Our OEM truck revenues declined approximately $30 million versus the second quarter of last year.

We also saw a decline in our global construction market revenues versus the second quarter of last year of approximately $18 million or 31%.

Our military markets also saw a decline of approximately $3.5 million or 45% from the same period last year.

These market declines in OEM truck, construction, and military were offset by increases from other end markets including bus, ag, and aftermarket which collectively increased nearly $8 million or 15% from the second quarter of last year.

On a sequential basis, compared to the first quarter of 2013, our revenues increased approximately $21.1 million or 12%.

Our OEM truck revenues increased by $13.5 million or 17%.

Our global construction revenues increased from the first quarter of this year by approximately $3 million, or 8.5%, as Rich mentioned.

All other end markets collectively also increased by approximately $4.5 million or 7%, and it's primarily related to a decline in our military orders, offset by increases in our aftermarket, bus, and other markets.

Operating income for the second quarter was $2.1 million compared to a loss of $273,000 in the first quarter of this year, an improvement of approximately $2.4 million on an increase in revenues of $21.1 million.

As mentioned in the press release we did incur certain expenses this quarter related to the change in leadership of approximately $2.5 million, as well as approximately $1.1 million of foreign exchange expense during the quarter, of which approximately $600,000 was related to the marking to market of our future contracts.

We call these items out because we believe it is important to make sure you understand certain one-time or unique costs during the period as we look at sequential and year-over-year performance.

Excluding these items for the quarter, our operating income improved by approximately $6 million on a revenue increase of $21.1 million, or 28% on a sequential basis from the first quarter.

As you know, we continue to focus on flexing our costs up and down to achieve our targeted 20% to 25% contribution margin, and we are pleased to have exceeded our targets this past quarter when comparing to the first quarter of this year.

Depreciation and amortization was approximately $4.2 million and capital spending was approximately $3.3 million for the quarter.

Our effective tax rate for the quarter was 46.4%.

As we look to the balance of this year, we may continue to see fluctuations in our tax rate depending on how our markets and earnings impact our domestic operations and our foreign operations where we do not record tax benefits due to the need for valuation allowances.

Based on our outlook we currently expect tax rates for the second half of the year to be in the 45% range, comparable to that of this past quarter.

From a fully diluted EPS standpoint, the quarter came in at a loss of $0.06.

As of the end of this past quarter, we had a cash balance of approximately $64.9 million.

This cash balance combined with our ABL revolver capacity means we have over $100 million of liquidity available and puts us in a very good position as we continue to focus on long-term initiatives and growth opportunities.

Our working capital initiatives, specifically around inventory management and improvement, have proven successful to date this year.

And we will continue to remain focused on maintaining flexibility in our capital structure.

Looking at the full-year 2013, our estimate for North American Class 8 units is in the range of 250,000 to 255,000 units, as Rich mentioned.

As Rich also indicated, our current expectations for our global construction market is that the second half of this year may see a 10% uptick and above the run rate from this past quarter, with heavier weighting towards the end of the year.

Aside from market and revenue expectations, we continue to focus on cost opportunities and our targeted contribution margin levels.

And we are heavily focused on further improvement of our operating margin as we progress through the balance of this year and into 2014.

And with that, we will open up the call to any questions.

(Operator Instructions) David Leiker, Baird.

Good morning, everyone.

Rich, a couple of things.

I understand you talked about continuing to look at the business and evaluating where the Company is.

I was wondering if you could share some thoughts of within the business model which end markets you think CVG has got the strongest competitive position, and where there's places that you may need to bolster it in some way.

Sure.

I think if you look across the Company, you've got to be impressed with our competitive position with truck, especially North American truck.

It is a strength for the Company right now.

It is a very important market for us and it is one we are going to continue to be focused on.

I would say, as I mentioned in my remarks, I think the single greatest opportunity we have for growth going forward is in global construction equipment.

I think we're doing a very good job in working with some of the multinational players in their home countries, but also outside of the home countries, especially in China and Asia.

As we look at the opportunity for improved share by customer, I think we have got real upside.

So truck is a strong point.

I think construction equipment is a real bright spot for us and an opportunity we're going to be intensely focused on going forward.

Great.

Then on the cost structure side, how much of this do you think -- I guess what kind of scale do you think of actions need to be there?

Is it more trimming and pruning a couple of places, or is there something more dramatic?

Well, you know, we're really at the outset of that analysis.

I will have a better sense of that, I think, probably a month or so down the road.

I don't think we are looking at dramatic steps.

As you characterize it, pruning around the edges.

I suppose it's closer to that than the other end of the spectrum.

But I will have a better sense of that probably four, six weeks down the road.

Then the last item, I think I know the answer; but there has been this target out there of doubling the size of the Company in 2016 through organic growth and through acquisitions.

Any thoughts on that at this stage?

Yes, David, I am digging into that.

I think a couple of comments.

One is it -- I think the opportunity for organic growth over the next couple years is probably greater than we might have assumed at the time that we set that target.

So whatever the target is I think maybe a higher percentage of that will come from organic growth than we anticipated, especially on the construction side.

But I will again -- a month or so down the road I think I will probably have a better sense as to the specific target we set in 2016.

I do know that we are also going to be much more focused on ensuring we are driving profitable growth.

So whatever the target is, there is going to be a very sharp focus on ensuring we are driving industry-leading profitability as well.

Okay, great.

Thanks.

I realize it was a little early for that, but just wanted an initial thought from you.

Sure.

Thank you.

You bet.

Robert Kosowsky, Sidoti.

Hi, good morning, Rich, Chad, and John.

How are you doing?

Just I guess first question; thanks for the overview you gave.

But more specifically related to this year and the next 12-month outlook, how do some of the market outgrowth opportunities look?

I know we have been waiting for Foton to get launched; and just anything else you could see layering in over the next few quarters that could be meaningful or at least just additive to the sequential growth profile?

Well, I know that a large part of our projected growth has been in Asia, especially in China.

I think there are a couple of things happening in China that makes me optimistic that we are going to see a more favorable growth trajectory there in the next 12 to 18 months.

One is that there has been some credit easing.

Another is there has been some discussion about government stimulus to ensure that they are at least at a 7.5% GDP growth rate for the full-year 2013, and 7.5% seems to be the standard for GDP growth going forward.

So the combination of credit easing with maybe some government stimulus in China makes me optimistic that we are going to see more favorable growth trend in China.

Europe is relatively flat.

I think everybody is aware of the overall economic situation in Europe.

We don't have great expectations for improved markets in Europe.

North America with perhaps a couple of policy moves by the Obama administration could be much more attractive.

But we are optimistic about North American growth as well.

Okay, thank you.

Then also, just regarding the Foton --

And, Rob, I'm sorry, just one other thing.

I wanted to mention the aftermarket as well.

Even as we might see lower growth rates in certain markets I think we're going to continue to see improved aftermarket opportunity, as people turn to maintaining and updating product as opposed to replacing with new.

Okay, cool.

Thank you very much.

(Operator Instructions) Ann Duignan, JPMorgan.

Hey, it is Mike Shlisky filling in for Ann.

I wanted to talk quickly on the DeKalb closure.

Maybe you can give us an update on how that is going and what kind of savings you expect during 2013 and maybe on an annualized basis going forward.

And I guess the same question for Statesville; any update there?

Yes, thanks, Mike.

Good question.

What we had talked about in the past was, combined, those two consolidation opportunities were going to be between $3 million to $4 million of annualized savings.

As you know, the Statesville closure just happened in this past quarter in the month of May.

DeKalb is not fully there yet, so it is coming in the back half of the year.

But when completed we expect between $3 million to $4 million of annualized savings for those two combined.

Great, thanks.

Just secondly, the Class 8 truck industry had a pretty big ramp in production during Q2 versus Q1.

Can you maybe just take us through how you guys were able to react during the quarter?

Were you paying overtime?

Were you running more shifts?

Just a little bit about how you guys were able to adjust to the higher industry production levels during the quarter.

Well, there was indeed a ramp up, but I think it is all relative to the starting point, Mike.

I think with Q1 being at 55,000 units, that is clearly in our view below the ongoing demand.

And Q2 levels seem to be in the right range of what we would classify as a normal market.

So although there was a reasonable uptick from Q1 to Q2, I think it is relative to the starting point of being fairly depressed in Q1.

So we didn't have a lot of significant costs or uptick or ramp-up costs in the second quarter.

Although the percentage was up, it was a fairly gradual uptick as you look at Q1, into the three months of the second quarter.

So nothing significant really to call out in terms of overtime or ramp-up costs from our perspective.

Okay, great.

Just one quick final one here.

Based on what you guys -- what your commentary was during your opening comments there, it looks like you guys have scaled back your Class 8 forecast just a little bit.

And it looks like one of the truck OEMs did that as well today.

Can I just verify that you guys are just a little bit less -- a little bit more towards the lower end of your prior guidance than you were?

Indeed.

That is right, Mike.

We were previously at 250,000 to 260,000 for the year.

So we trimmed that back to 250,000 to 255,000.

Q2 was relatively close to what we expected, and what we did is just trimmed back our second half of the year by 5,000 units or so.

So not significant; but you are correct.

It is closer to our previous lower end of the range.

I guess, what caused that minor scale-back there?

Was it just on what we saw from orders in June?

Or is there any kind of other comments you are hearing from the OEMs out there?

No, I wouldn't classify our change as a significant one.

It is really a combined effort of what we see in orders and our discussions and conversations of how we feel about the customers' planning for the back half of the year.

So there is a lot of inputs that go into that, but I don't think our change is significant from where we previously were at.

Okay, fair enough.

Thanks so much.

Barry Haimes, Sage.

Hi, yes, just following up on that last question, I wonder if you could talk a little bit about the psychology of the customers on the truck side from the vantage point of -- if we look at trucking, freight has been soft.

Pricing has been also below what was expected earlier in the year.

And HOS has come and gone and at least so far there doesn't seem to be any great impact.

So with HOS -- with that big question mark come and gone, what are you hearing from the customer base?

Thanks.

Well, I think all of those inputs go into our outlook for the back half of the year.

As the previous question was, what caused us to soften a little bit?

Again, although it wasn't a significant drop, I mean a lot of those things are inputs into our decision and our outlook for the balance of the year.

Of course, the biggest driver is what we're hearing from the customers in terms of their production levels and where they are going to target their market share.

But without getting into specific customer matters, those are all the things -- the softening you mentioned in freight and a lot of those inputs is really what drives our outlook for the balance of the year.

I think as we look to 2014, there has been a lot of optimism out there in terms of units.

We will probably have a better sense of where our outlook for 2014 is at the time of our next earnings call.

But I think a lot of those things that you had mentioned will certainly play into that.

Then just one quick follow-up if I could.

If you look at the Big Four truck OEMs and if you look at your market shares with each of them, compared with their market shares, are there any of those four we should think about where your market share is greater than theirs by a fair amount or less?

Or are you roughly spread across the four comparable to their market shares?

Well, our products are fairly well spread across the top four.

Obviously, as you know, Paccar has been one of our top customers, along with Daimler, Volvo/Mack, Navistar.

So the big thing that we would typically call out from a market share or a content perspective is probably the Volvo/Mack side of things because we do work with Mack and Volvo on the structural cab itself, which just in and of itself is a buyer higher-content item.

So that particular notion aside, we are fairly well spread across each of the top four from a content and share perspective, from our products.

Great.

Thanks very much.

Appreciate it.

Gentlemen, we have no more questions in the queue at this time.

No more questions?

No, sir.

No more questions.

Okay, everybody, thanks for joining the call.

We hope you have been given a good sense of where we came out in the second quarter and some of our plans going forward.

We look forward to getting back together with you at the end of the third quarter.

Thanks very much.

Thank you, everybody.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.