Commercial Vehicle Group Inc (CVGI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the first quarter 2014 Commercial Vehicle Group, Inc.

earnings conference call.

My name is Lisa 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. John Hyre, Director of Investor Relations.

Please proceed, sir.

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

Rich Lavin, our CEO, will give a brief Company update, and Tim Trenary, our CFO, will take you through our first quarter 2014 results.

We will then answer questions.

I would like to remind you that this conference call is being webcast.

It may also contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost savings initiatives, and new product initiatives, among others.

Actual results may differ from anticipated results because of certain risks and uncertainties.

These risks and uncertainties may include, but are not limited to, the economic conditions in the market in which CVG operates, fluctuation in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

With that, I would now like to turn the call over to Rich.

Thanks, John.

Good morning, everybody, and welcome to our first quarter call.

We are pleased to report that our revenues improved by $20.2 million or 11%.

Gross profit improved by $6.2 million, and operating income improved by $5.7 million.

The revenue increase largely resulted from higher production volumes in North American heavy duty truck industry, and improved sales to construction equipment OEMs in the global markets we serve.

During the quarter, the conversion of higher sales into operating income approached 30%, compared to our historical incremental margin performance of 20% to 25%.

This was primarily a consequence of the operating leverage we achieved from cost structure discipline in a rising market.

As you know, heavy-duty truck orders have been comparatively strong during the first three months of the year.

This leads us to expect an improving industry trend through the remainder of 2014.

Our revised forecast for the 2014 North American heavy-duty truck build is in the range of 265,000 to 285,000 units.

We believe this trend is being led by improved freight growth and aging fleet that needs replacement, and increased optimism about the US economy going forward.

With improved orders, we have begun to see an uptick in our truck-related volumes.

As the market improves, we have the manufacturing capacity and a stable supply base in place to serve our customers.

We don't anticipate any significant production issues as customer demand increases.

We believe that our global construction end markets will experience modest improvements for the remainder of the year and we expect the European economy to remain relatively flat to the remainder of 2014.

We continue to see China as a significant growth opportunity for CVG.

Chinese GDP expectations on the order of 7.5% for the year, combined with continued infrastructure development and organization, lead us to believe that the Chinese construction equipment industry will provide CVG with significant growth opportunities going forward.

We also see on highway truck and agriculture as important growth areas, particularly as the Chinese government increases focus on domestic consumption as an economic growth driver.

In short, we feel that projected increases in production levels for the North American heavy-duty truck market, the return of inventories to more normal levels in the global construction markets, and the economic growth forecast in North America and China bode well for the balance of the year.

As regards new business development, we are pleased to announce that we have been awarded contracts to provide additional seating projects to a major North American heavy and medium duty truck OEM.

This new seating, designed primarily for vocational applications, will be used in both medium and heavy-duty trucks.

During the quarter, we also gained new wire harness business with a major North American OEM in the agricultural end market.

We project annualized run rate of approximately $14.3 million from this new business award.

CVG's aftermarket group and a major automotive replacement parts and accessories retailer in the United States are moving forward with plans for the retailer to sell national and Bostrom seats through its network of more than 100 stores in the US.

We have already delivered a container-load of seats to their showrooms.

We anticipate this new arrangement could provide $550,000 per year in additional aftermarket sales as the program matures.

Within CVG, we further refined our global business organization by assigning our structures operations to our global truck and bus division under Pat Miller.

We believe the structure's products are more appropriately managed as part of the truck and bus end markets.

This change will allow Timo Haatanen to focus more on increasing CVG's important aftermarket business.

Under this new structure, Timo will also have responsibility for supply chain management.

We believe a successfully-led supply chain management group will help us deliver efficiencies by leveraging our supplier selection, material buy, and VA/VE activities across all our global business segments.

I am also pleased to announce that Kevin Laing joined CVG on April 1 as Managing Director of our European, Middle Eastern, and African markets.

Kevin will have responsibility for the development and deployment of business strategies across EMEA, as well as manufacturing operations in all of our facilities in the EMEA region.

In this role, Kevin will report directly to me with a matrix reporting relationship to our three global business presidents.

Kevin comes to CVG following a successful career at McKinsey & Company.

He has extensive experience in the global automotive and construction equipment industries.

His global experience includes assignments in China, India, and Europe.

Also during the quarter, we announced a plan to close our production and warehouse facility in Tigard, Oregon.

The work performed there includes the production of interior trim components such as instrument panels and storage cabinets used in large commercial vehicles.

The majority of this work will be distributed to other CVG facilities in North America.

We expect to complete closure of Tigard by the end of December 2014.

We anticipate restructuring charges of approximately $3.2 million to $3.5 million that will be incurred by year-end 2014.

The annualized savings from this action are expected to be in the range of $1.5 million to $2.5 million.

As we have indicated in previous calls, we evaluate our manufacturing capacity utilization and footprint in the normal course of business.

The Tigard action followed a lengthy evaluation, and it was necessary to respond to changing customer needs and industry demands.

I hope you can see that we are fundamentally and very purposely changing CVG in several respects.

We are refocusing SG&A away from what I would characterize as pure overhead in the areas that are going to drive profitable organic growth well into the future.

We now have a globally focused leadership team in place with end-to-end accountabilities for developing our businesses on a global basis.

We are also in the process of centralizing our purchasing function into a global organization that will proactively help drive synergies and cost reduction opportunities with the key suppliers.

Our product line managers are going to be key leaders and contributors in our organization.

They will be accountable for the design of our products and our go-to-market strategies.

They will introduce a much better understanding of customer expectations in markets around the world, and help ensure we continue to provide each of our OEM customers with highly differentiated cab systems and components.

They will help us, as a global supplier to global OEMs, design and offer the components that will help make our customers' products more attractive and value-added based on each market's and customer's specific needs.

Overall, that will help us better -- build better customer relationships and, over the long-term, a better Company for our employees and our shareholders.

We look forward to sharing our results with you in the coming quarters.

Thanks again to everybody for calling in.

With that, I will turn the call over to Tim for comment on our financial performance.

Thank you, Rich.

As Rich mentioned, compared to the first quarter of 2013, our topline and therefore our financial results were positively affected by increased build in the North American heavy duty truck market, and by increased production volumes in the global construction markets we serve.

Our first quarter 2014 revenues were $198.1 million, an increase of $20.2 million or an 11.4% improvement compared with the first quarter of 2013.

On a sequential basis, that is compared to the fourth quarter of 2013, our revenue increased $15 million or by 8.2%.

Operating income in the first quarter was $5.4 million, compared to operating loss of $0.3 million in the first quarter of 2013.

Compared to the fourth quarter of 2013, our operating income decreased $2.6 million, largely due to the increased SG&A spend associated with the development of the infrastructure necessary to execute on our initiatives.

Net loss for the quarter net was $0.5 million or $0.02 per diluted share compared to a net loss of $4.6 million or $0.16 per diluted share in the first quarter of 2013.

Included in first quarter 2014 pretax results is a severance charge of $0.5 million associated with the impending closure of our Tigard, Oregon facility and an asset impairment charge of approximately $0.8 million, resulting from the sale of our Norwalk, Ohio facility, which was closed in 2010.

The Norwalk facility was sold for $0.6 million in April.

SG&A for the quarter was $18.5 million compared to $18 million in the first quarter of 2013.

As we have previously indicated, actions taken over the last two quarters of 2013 reduced our SG&A expense in the fourth quarter of 2013 to an unsustainable level.

Accordingly, during the first quarter of 2014, our SG&A spending returned to more historically normal levels.

This increase in SG&A, when compared to the fourth quarter of 2013, was largely due to enhancements in the manner in which we go to market, including the development of a product line management infrastructure and actions to institutionalize our operational excellence effort, and the development of a centrally-led procurement organization.

Depreciation was $4 million in the first quarter and amortization was $0.4 million.

First quarter capital spending was $1.5 million.

We expect increased capital spending throughout the remainder of the year as we invest in our facilities, sales growth, operational excellence, and other activities.

We continue to anticipate that total 2014 capital spending will be on the order of $20 million.

An income tax provision of $0.8 million was recorded for the three months ended March 31, 2014, compared to an income tax benefit of $1 million for the prior year period.

The Company's effective tax rate in the first quarter was adversely affected as certain favorable tax laws, including the research and development tax credit, were not extended by Congress.

Additionally, certain foreign affiliates, which are subject to deferred tax asset valuation allowances, experienced modest pretax losses which could not be used to offset the tax provision for affiliates that generated pretax income.

We finished the quarter with almost $74 million of cash and approximately $37 million of availability from our ABL facility, and therefore liquidity of over $100 million.

To conclude, the growth in our topline during the quarter is encouraging and we were pleased with the rate at which we were able to convert the incremental sales into gross profit and operating income.

We are optimistic as regards the general health of our global end markets and we look forward to further developing CVG during the year and beyond.

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

(Operator Instructions) Robert Kosowsky, Sidoti.

I just had a question about the raw material opportunity with this new global sourcing initiative.

I was wondering if you could give us an idea of what savings you potentially see and maybe the cadence of that.

Would it be something that might be upfront a lot of savings, and over time, you get annual productivity over time?

And the kind of framework, I look at that as WABCO gets about 5%.

Meritor gets like 2% to 3%.

I am wondering where CVG I would fit in on a longer-term basis and also if there is upfront stair-step savings as well.

Yes, Rob.

It's Rich Lavin.

Thanks for your question.

[Jim Buttermyer] has been with us for just four months.

He is a vice president with the responsibility for the global supply chain management; he reports to Timo Haatanen.

Jim is just in the process really of digging into our supply base and our logistics network to better understand what the savings and efficiencies opportunities are for us going forward.

We had a 90-day review with him about a month ago and I would say we were encouraged by the progress he has made in a very short period of time in identifying opportunities in both materials and in logistics.

I think it is too early in the game, Rob, to give you a sense as to what we are looking for both in the short-term and in the long-term, being that will be driven by Jim and his global organization.

But we have high expectations for what we are be going to be able to deliver out of that group with Jim's leadership.

So I guess I would ask you, you will stand by.

And as we get a better sense of where the opportunities are, how Jim is going to address it along with our division presidents and our regional managing directors, we'll give you a better idea of what we can expect in the way of ongoing efficiencies, improvements, and cost reductions.

One thing to keep in mind, I think, is that Jim is going to be focused not only inside the four walls of CVG.

He is also going to be focused on working with our suppliers to improve their operational efficiencies and to ensure that we are capturing the savings or some of the savings they are realizing in their shops.

Okay.

That's very helpful.

And on the new business wins, it is good to see those new contracts rolling in.

I'm wondering if these are fruits of the new sales approach.

Or were these things that CVGI was working on for a while?

And also when do we expect to see the new sales approach really start to move the needle going forward?

The deals that we reported on this morning, Rob, had been in process for a while.

So I couldn't characterize them as the direct result of the product managed organizations or an increased focus on a go-to-market.

But we are beginning to see opportunities come up in those areas as a result of the product managers' leadership and a sharper focus on sales and go to market.

I would expect we would be in a position by the end of this year to begin to report on improvements that we are seeing and opportunities that are being created through the product managers and their sales organizations.

Okay.

Fair enough.

And then, also, a question for Tim.

Where were the charges in the P&L?

Yes.

Hi, Rob.

The Tigard -- the charges associated with the Tigard closure and the building in Ohio, in Norwalk, are both in cost of sales.

(Operator Instructions) Gregory Macosko, Montrose Advisors.

Just one question I had, with regard to exports to Mexico and the like, I know that in years past there were a number of -- there were cabs and things that were exported to Mexico.

And the nature of those exports, there was sort of higher end and lower end and the like.

And I wondered, is that activity still in place and could you give us some description of it?

Yes.

This is Rich.

I mean, as we have, I'd say, expanded our manufacturing footprint in Mexico, there has been less exported to Mexico from the US.

But there is still exports occurring between the US and our Mexican operations.

As far as the high tier, mid-tier aspect of your question is concerned, there is still some of that.

And there will probably be more of that going forward, not only in terms of materials that we are exporting from the US, but also components that we are designing and manufacturing in country.

Simply because -- you have got to have a couple of different price points, a couple of different value propositions to address the varying needs among customers in markets like Mexico, like China, like India.

So our product managers have really taken the challenge of taking through the tiered design approach that they need to take with their products to ensure that we have a complete lineup of products to offer a across different value propositions in those markets.

We are also looking at tiering our offerings in the US and other markets.

But it is especially important that we have got different price points, different value propositions to address customer needs in those emerging markets.

Are you seeing any trend in that regard there -- with regard to high versus medium and low end?

Is there any direction that it is setting, or has it pretty much been a steady mix?

You know, it's interesting.

I am most familiar, I think, at this stage with what we have seen in the construction equipment market in China.

And I think with some of the better Chinese OEMs we are seeing that their product and component designs are moving more in the direction of the multinational players like Caterpillar, Komatsu, Volvo, and the others.

And we are also seeing increasing prices on those upgraded products and components as those OEMs go to market and compete with the other multinationals.

So I would say there is a trend in that direction and I would expect we're going to see that in the other markets as well, and also, with other products and other industries in China.

So, yes, there has been movement in that direction for some time.

Hard to characterize, I guess, how strong it is, but it is occurring.

Okay.

Good.

Very nice incremental profit improvement.

Thank you.

(Operator Instructions) Jeff Bernstein, AH Lisanti.

Just a couple.

You talked about the facilities closures as being part of ongoing operations.

Is that to mean that you have completed a strategic review of all the manufacturing operations of the Company, and you are sort of satisfied, except for tactical changes with where you are at?

Or should we expect some commentary on a more strategic look at some point in the future?

That is my first question.

Okay, Jeff.

It is Tim.

I would answer your question this way.

The Company's assessment of its manufacturing capacity utilization and its footprint, in a strategic sense, is ongoing.

As I think we have indicated in the past on a call, the Company, I think, six, seven, eight weeks ago launched a strategic planning process that we expect to conclude this summer that will inform further as to the appropriate level of manufacturing capacity utilization and the footprint.

Having said that, I used to -- the cadence and the discipline, if you will, that even after an assessment of capacity utilization and footprint in a strategic sense, the Company, to your point, would, on an ongoing basis and in the normal course, continue to make tactical evaluations of that.

So, while to date -- and Tigard is an example of this -- we have seen fit, pending the completion of the strategic planning process, to take an action, I think it is reasonable to assume that we should all remain open-minded with respect to possible additional actions.

Understood.

And then, additionally, in terms of the various component parts that you guys make, I think originally there was the idea that complete cab outsourcing would be a trend.

That never seemed to really develop.

Do you see opportunities there in the future, whether it is in another geography or whether it is ag versus heavy duty truck?

Or are you also reviewing the portfolio of products that the Company is making and might we hear some changes there at some point?

Yes, Jeff.

It's Rich Lavin.

The complete cab outsourcing idea is one that I think the Company took a hard look at a couple of years ago.

It is one that we are keeping in front of us, frankly, as we look at our longer-term strategy for driving organic growth.

But, right now, we are really focused on ensuring that we have got as complete a set of parts and components as possible to offer to OEMs across truck, construction, and ag to ensure that we are seen as those OEMs' key suppliers and key contributors, if you will, to their value add; to their value proposition.

So I suspect that when we roll the long-term strategy out in the August/September timeframe, we're going to have more to say about that.

But we are always very interested in adding to our stable of components.

And we have challenged our product managers, frankly, to think hard about what we can do to design additional components inside CVG to add to our offerings.

Great.

And then, lastly, are you guys planning to have an analyst meeting with the Street to go through the results of the strategic reviews?

We are, Jeff.

John will get back to all of you with our plans.

But we are thinking late summer, early fall, we will probably have that wrapped up and ready to share with you all.

There are no additional questions.

I would now like to turn the presentation back over to Mr. Rich Lavin for final comments.

Thank you.

Listen, I'd just close by thanking all of you for dialing in.

We appreciate your questions.

We appreciate the opportunity to share with you our results for the first quarter.

We look forward to sharing our results going forward.

Just a reminder again that John will be getting in touch with you regarding the completion of our strategic planning process and the event that we would like to get scheduled late summer, early fall, to share the outcome of the planning process with all of you.

Thanks very much.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.