Commercial Vehicle Group Inc (CVGI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Commercial Vehicle Group Incorporated earnings conference call.

My name is Denise, and I will be the operator for today.

At this time, all participants are in a 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 will now turn the conference over to Mr. Terry Hammett, head of Investor Relations.

Please proceed.

Thank you, Denise.

And welcome everyone to our conference call.

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

We will then answer questions.

I would like to remind you that this conference call is being webcast and may also contain forward-looking statements including but not limited to expectations for future periods regarding market trends, cost-saving 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 markets in which CVG operates, fluctuations 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.

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

Thanks, Terry.

Good morning, and welcome to our call.

As mentioned in the earnings release we issued last night, our sales continue to benefit from higher production volumes by North American heavy-duty truck OEMs and in the global construction markets we serve.

We are pleased to report that our revenues improved by $17.1 million, or by 8.6%, over the prior-year period.

And the gross profit and operating income improved by $5.3 million and $6.9 million, respectively.

Conversion of the higher sales and operating income during the quarter exceeded our historical conversion rate as a result of, in part, greater cross discipline across the organization.

Demand for our medium- and heavy-duty truck products in North America benefited from continuing comparatively strong build rates during the second quarter this year.

Our revised forecast for the 2014 North American heavy-duty truck build is in the range of 280,000 to 300,000 units.

We believe this trend is being sustained by growth in freight volumes, replacement of aging vehicles, and continued optimism about the US economy.

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

We have the manufacturing capacity and supply base in place to meet the elevated production volumes we are experiencing in North America, and therefore we are well positioned to meet our customers' supply demands.

China, a key market in our organic growth strategy, is expected to see GDP growth of about 7.5% in 2014.

Targeted economic stimulus measures, the so-called mini stimulus, are being introduced that are expected to begin to favorably impact the infrastructure and construction in the second half of the year.

Therefore, we continue to believe that the Chinese construction equipment market will provide CVG with market penetration and growth opportunities as the effects of the mini-stimulus play out.

We also believe that as China and China's economy continues to be driven more by domestic consumption than by foreign direct investment and capital formation, the need for roads and on-highway trucks to transport goods is expected to continue to increase and drive demand for construction equipment and heavy-duty trucks.

We believe our global construction end markets will continue to experience modest improvement for the remainder of the year.

However, we also believe the European economy will remain relatively flat throughout the remainder of the year, as will the construction and heavy-duty truck industries in Europe.

We continue to focus on agriculture equipment market, especially in North America.

Agriculture is a market we believe offers significant growth potential for us to improve market penetration.

We intend to allocate resources to increase the sale of our products in this market, both in North America and globally.

I'd like to mention that during the quarter, our wire harness facility in the Czech Republic received a Supplier Quality Excellence Process award from Caterpillar, thereby meeting the high-quality standard set by Caterpillar for its suppliers.

In addition, several facilities, including our Shadyside, Ohio, facility, received the PACCAR Quality Achievement Award for three consecutive years, an extraordinary accomplishment that reflects well on these facilities, the global truck and bus division, and our entire organization.

Our ability to compete for sustained business with our customers begins with operational excellence, and these facilities have contributed to excellence in CVG.

Within CVG, we continue to refine our global business organization, as evidenced by the recently announced realignment of our aftermarket business.

The North American aftermarket business will now report to Pat Miller in his capacity as President of Global Truck and Bus.

Jeff Parish, Asia-Pacific managing director, will assume responsibility for the APAC aftermarket business.

And Kevin Lane, M.D. for Europe, the Middle East, and Africa, will assume responsibility for the EMEA aftermarket business.

The recent change in our executive leadership team to include managing directors in both the APAC and EMEA geographies created an opportunity for us to now more readily address the unique local needs of our aftermarket customers in all the geographies we serve.

We also recently announced that Ulf Lindqwister joined CVG on August 4 as Chief Administrative Officer with responsibility for, among other areas, research and development, supply chain and logistics management, and corporate business development.

Ulf comes to CVG from Caterpillar, where he served most recently as manager of growth, M&A, and external relationships for CAD and electronics.

His skill set and experience are well suited to more effectively focus our product design and manufacturing and operating cost structure initiatives to better support our product line management structure.

Ulf is an outstanding addition to a strong leadership team focused on delivering industry-leading results, and his addition will allow me to spend more time addressing our customers' needs and strengthening customer relationships.

In early June, we announced the appointment of Roger Fix and Harold Bevis to the Board of Directors.

Mr. Fix currently serves as the nonexecutive chairman of the Board of Directors of Standex International Corporation.

He was the President and Chief Executive Officer of Standex from 2003 to 2014.

Mr. Bevis has served as a director and as President and Chief Executive Officer of Xerium Technologies Incorporated since August 2012.

Both gentlemen are very knowledgeable and provide years of operational, manufacturing, and other experience.

They are fine additions to the Board of CVG.

As you may recall, during 2013 we conducted an in-depth evaluation of the Company.

This evaluation gave rise to a number of key initiatives intended to enhance the Company's growth prospects and profitability.

I believe our improved financial performance in 2014 is in part the reflection of this work.

Having addressed these near-term needs of our Company, it is now time to turn our attention to our longer-term strategy, what we refer to as CVG 2020.

After a number of months in the making, the CVG 2020 strategic plan is taking shape, and the strategic planning process is coming to a close.

I look forward to sharing CVG 2020 with you in the not-too-distant future at our analyst day conference early this fall.

In closing, I would emphasize that we are happy with our Q2 results.

Our second-quarter results are a reflection of where we are early in our journey to improve CVG's competitiveness in the global marketplace, to enhance our customer relationships, and to improve our financial performance of the long term.

Again, thanks to everybody for calling in.

And with that, I'll turn the call over to Tim for a comment on our financial performance.

Thank you, Rich.

As Rich mentioned, as compared to the second quarter of 2013 our financial results continue to benefit from increased build rates by North American heavy-duty truck OEMs and by increased construction equipment production volumes in the global construction markets we serve.

Our second-quarter 2014 revenues were $216 million, an increase of $17.1 million, or 8.6%, compared to the second quarter of 2013.

On a sequential basis -- that is, compared to the first quarter of 2014 -- our revenue increased by $17.9 million, or by 9%.

Gross profit in the second quarter was $28.2 million compared to gross profit of $22.9 million in the second quarter of 2013.

This $5.3 million improvement in gross profit represents a 31% conversion of revenues into gross profit.

Additionally, our gross profit margin in the second quarter of 2014 improved to 13%.

Operating income in the second quarter was $9 million compared to operating income of $2.1 million in the second quarter of 2013.

This represents a $6.9 million improvement in operating income from the prior-year period.

Conversion of sales into operating income in the quarter compared to the prior-year period benefited in part by $2.5 million in costs associated with the executive changeover in the second quarter of 2013.

Before giving effect to these costs, and as Rich mentioned at the outset of our call today, conversion of the higher sales into operating income during the quarter exceeded our historical conversion rate as a result of cost discipline across the organization.

SG&A for the quarter was $18.7 million, was generally consistent with historically normal SG&A levels and compared favorably to the $20.3 million of SG&A in the second quarter of 2013, which included the cost of the executive changeover.

Net income for the quarter was $2.7 million, or $0.09 per diluted share, compared to a net loss of $1.7 million, or a loss of $0.06 per diluted share, in the second quarter of 2013.

Depreciation was $4.2 million in the second quarter, and amortization was $400,000.

Second-quarter capital spending was $3.3 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.

An income tax provision of $1.1 million was recorded in the three months ended June 30, 2014, compared to an income tax benefit of $1.4 million for the prior-year period.

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

The tax rate was also impacted by valuation allowances in certain of our foreign subsidiaries.

We finished the quarter with $70.3 million of cash and approximately $37 million of availability from our ABL facility; therefore, we have liquidity of over $100 million.

To conclude, generally we see positive economic factors in our key global markets and industries.

The continued growth in our topline during the quarter is encouraging, as is the cost discipline we were able to maintain in a rising North American heavy-duty truck market.

And, as Rich mentioned, we look forward to rolling out our strategic plan, CVG 2020, earlier this fall.

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

(Operator Instructions).

Robert Kosowsky, Sidoti.

First question is just on the sequential margin expansion.

I was wondering if there are any impacts.

I thought you might have a little bit better, I guess, sequential incremental margins coming through.

I wonder if there are any pros and cons bridging the two quarters, if you can shed some light on that.

Sequential, the first quarter of 2014 compared to the second quarter?

Yes.

No, there was nothing really dramatic -- different as between the two quarters, Rob.

I have the conversion at well within the band that we generally expect.

We generally look for 20% to 25%; I have it at 22%.

So it's well within the boundaries that we expect.

As I said, there was nothing dramatically different as between the two quarters.

There are the vagaries of the manufacturing business in any given period compared to another mix, for example.

Currency fluctuations.

Some impact -- not much, but some impact in the second quarter on our manufacturing efficiency associated with the ramp-up of the truck build in the second quarter in North America.

And then of course, as we previously mentioned, we are in the process of moving our production out of a facility in the Northwest -- the Tiger 200 facilities in the Company.

So in the course of preparing for that move, there's bank builds, et cetera.

So there's some modest effects on manufacturing efficiency there.

But look, at 22% conversion sequentially, well within our band and, I think, satisfactory.

Okay.

And then can you talk about how you are, I guess -- you're looking at SG&A for the back half of the year.

Two quarters now, about $18 million, $18.5 million, is that a sustainable rate we should be looking at?

I think the $18 million that we had in the second quarter is -- first of all, it's indicative setting aside -- sort of one-off items like the executive changeover last year, setting those aside and also setting aside, as we've describe before, some of the actions that were taken in the third quarter last year to make room for some more value-accretive spend that we started to put in place in the fourth quarter.

Setting those sort of fluctuations aside, a spend rate of $18 million on a quarterly basis not only reflects the historical -- the Company's historical spend rates worth about an $800 million in sales or so, but I think -- I mean, I think that's basically -- it reflects historical rates, and I don't see a lot of fluctuation going forward in the near term.

Okay.

And then finally back in the operations, how do you feel about being able to handle another, say, 10% increase in truck production rates that might be come and giving the strong July orders that we saw?

As Rich mentioned, we have the infrastructure in place and the facilitation and, more specifically, the capacity -- manufacturing capacity to not only handle the current build rates, but to also handle build rates, within reason, in excess of the current build rates.

So we don't see that as an issue, and frankly it would be welcomed.

Rob, this is Rich.

I would only add that Pat Miller in the Global Truck and Bus division had performed very well during the first half in a rising industry.

We haven't missed customer orders as a result of rising demand.

And so I think they are well positioned over the last two quarters to meet increasing customer demand.

We are not concerned about that.

That's definitely good to hear.

And then finally, kind of longer-term growth question.

I know you're trying to expand a little more into agriculture and also aftermarket.

I'm wondering if there's any low-hanging fruit in any these industry verticals, and if you see these being materially bigger portions of the business in, say, five years.

Yes, Rob, we will speak to that I think in some detail during the analyst day when we roll out CVG 2020.

But I can tell you that we have significant opportunity for growth in a couple different industries in a couple of different regions; agriculture is probably at the top of the list.

So we do see opportunities for early gains, but we will be more specific in talking about our plans to address these opportunities during our CVG 2020 day in the fall.

All right.

Thank you very much, and good luck.

(Operator Instructions).

David Leiker, Baird.

This is Joe Vruwink on the line for David.

I wanted to kind of follow-up on the gross profit question.

If you look at your current revenue levels, they seem to be within, call it, 5% to 10% of the highs you were seeing in 2011 and 2012.

And I think, given where the OED production schedules are on trucks, you're going to be in pretty good position to get pretty close to those levels again.

If I look at gross margins now, they are about 200 basis points below on the same comparison to kind of that 2011, 2012 time frame.

Can you maybe help bridge the gap between these two time periods, and anything notable that comes to mind that might be contributing to the difference?

Joe, appreciate the question.

As I think you know, I haven't -- I wasn't at the Company in 2011 and 2012, so I'm not intimately familiar with the cost structure at that point in time.

So I'm going to be -- I'm not going to be helpful in sort of getting that bridging done for you.

I would say this, that given the current Company's current cost structure, going forward as we sit here today, as the sales fluctuate up or down, as I said in answer to Rob's call, we look for conversion in the range of 20% to 25%.

There is maybe -- okay, there's nothing maybe on a mix basis, obviously cap structures, that carry a little bit better margin there's probably some offsets from that.

But when you look at kind of footprint utilization or product mix, there's nothing obvious there that would be driving some of your near-term fluctuations?

Well, not to my knowledge.

But understanding that, again, I wasn't at the Company in 2011 and 2012, so it's difficult for me to be real specific in that regard.

I understand and appreciate that.

Maybe switching gears a bit, on the China construction commentary, so it seems like you guys are a little more positive just on the opportunity in that region relative to some of the comments out of your OE customers in the quarter.

When you say that's more of a CVG phenomenon, so you can see the new business opportunities you have in the region, what you're going to be launching in the second half that drives that type of backdrop, or are you actually seeing growth in your build schedules today on some of your existing programs?

Yes, this is Rich.

It's really a question of what we are projecting later in the second half as a result of some of the stimulus measures that have been undertaken by the Chinese government.

We are seeing a stable demand level right now in China.

Although I should say that working with a couple of our OEMs in China, we have seen some building finished goods inventory on their part.

So in the short term, we are not going to see effects of the mini-stimulus, but I would say in the back end of the second half of this year we should begin to see some improvement on the basis of the effects of those stimulus measures from the Chinese government.

And maybe from a cost side, Rich, are you happy with the resources you have committed to China, given kind of the new business growth outlook?

Or is some of this incremental CapEx being planned, is that to get more feet on the street, so to speak, in China to support that growth?

Yes, good question.

I would say with Geoff Perich we've got somebody leading our China business who is deeply knowledgeable of China and of our industries.

So we've got good leadership.

We are planning to add resources, make additional investments in China as a part of our CVG 2020 plan, and we are certainly, as I mentioned earlier, prepared to share some of that detail with you when we roll the plan out in the fall.

But right now, I think we are satisfied with where we stand in terms of resources dedicated to the opportunity at this stage.

But we are going to be talking about, I would say, significant growth plans for China as part of CVG 2020, and we look forward to sharing those plans with you later in the fall.

Great, I'll leave it there.

Looking forward to the event.

Thanks, guys.

We have no further questions.

I will now turn the call back over to management for closing remarks.

Please proceed.

This is Rich Lavin.

Again, thanks to everybody for calling in.

I want to emphasize that we are pleased with second-quarter results; we are by no means satisfied.

We see this quarter as a step in the direction of building highly competitive CVG going forward.

And, as we've mentioned several times, we look forward to sharing our CVG 2020 plan with you later in the fall.

Thanks for calling in, everybody.

This concludes today's conference, you may now disconnect.

Have a great day.