Commercial Vehicle Group Inc (CVGI) 2014 Q4 法說會逐字稿

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

My name is Katina, and I will be your coordinator for today.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call Mr. Terry Hammett, Head of Investor Relations.

Please proceed.

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

Rich Lavin, CEO, will provide a brief Company update, and Tim Trenary, our CFO, will provide commentary regarding our fourth-quarter and full-year 2014 results.

We will also provide commentary as regards to our long-term strategy, CVG 2020.

Pat Miller, President, Global Truck and Bus, is with us as well.

Rich, Tim and Pat will take questions at the end of today's comments.

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 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 markets in which CVG operates, fluctuations in 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, everyone, and welcome to our call.

We are pleased to report that our full-year 2014 revenues improved by $92 million or by 12.3% over the prior year and operating income improved $27.3 million.

We delivered operating income pull through within the range we expect period over period.

Our earnings per share this year were $0.26 as compared to a loss of $0.44 in 2013.

North American medium- and heavy-duty truck build rates finished strong in 2014.

297,000 Class 8 trucks were built were approximately 21% higher year over year.

As expected, demand for medium- and heavy-duty truck products in North America benefited from comparatively strong build rates during the fourth quarter and full fiscal year.

Leading into 2015, marketing indicators, including fleet age, fuel prices, improved fuel economy and GDP growth in the United States, suggests that the Class 8 truck build could be as much as -- could be up as much as 10% compared to 2014.

The market for our products in Asia-Pacific remains relatively flat in the short-term with the exception of India.

Heavy-duty truck production in China was flat from 2013 to 2014, and we believe that production will be down approximately 5% in 2015.

In India, medium- and heavy-duty truck production was up over 10% in 2014, while bus production was slightly down year over year.

Looking forward we believe that the truck build and bus build in India will increase moderately in 2015 tied to higher expectations for economic growth generally.

In Europe, we believe that 2015 heavy-duty truck production will increase moderately year over year.

Instability in Eastern Europe continues to drive uncertainty there, but we continue to be optimistic with current indications showing that the 2015 European heavy-duty truck production will be up moderately year over year.

We continue to monitor these medium- and heavy-duty truck markets and are encouraged by events such as ownership stakes established in China like global OEMs.

Earlier this year, Volvo, a key customer of CVG, completed the acquisition of 45% of Dongfeng Commercial Vehicles.

We have long-standing relationships with OEMs such as Volvo and look to leverage our existing relationships to take full advantage of opportunities to further penetrate the Chinese market in the coming years.

Our Global Construction and Agriculture sales performed well in 2014, up 12% year over year, primarily resulting from increased sales into the North American construction and agriculture markets.

We are expecting modest growth in the construction market in 2015 while we anticipate the agriculture markets to be flat.

Agriculture is a market that offers significant growth potential for CVG.

It is probably the single biggest area of potential growth for CVG globally, and we are addressing the opportunity through both expanding our product offerings and enhancing our marketing efforts.

In the coming year, we expect Global Construction and Agriculture sales growth at a slightly higher rate than the general market thanks to several new programs that were launched in 2014.

Given our potential to grow sales in construction and agriculture, we are committed to allocating the resources needed to increase our market share going forward.

As regards to the economic vitality of China and India, two of our important growth markets, China's 2015 GDP growth forecast is projected to be about 7%.

Economic policy driving domestic consumption and export recovery should help support this growth rate.

We understand that China is still planning to accelerate a number of infrastructure projects this year as policymakers seek to shore up growth in 2015 and expand development beyond the coastal regions.

We continue to view China as a key market in our organic growth strategy and believe that the Chinese truck, bus construction and agricultural equipment markets will provide CVG with market penetration and growth opportunities in 2015 and over the CVG 2020 period.

As we continue our focus on India, indications are that India anticipates GDP growth of almost 8% in 2015.

And with gradual recovery in market conditions, indications are that their GDP will increase modestly as we move into 2016.

India continues to make progress on economic reform and in implementing policies to encourage foreign direct investment.

We believe this will strengthen the need for infrastructure improvements, thus leading to an increase in the need for construction equipment to enable the infrastructure buildout and on-highway trucks to move the goods to respond to increased domestic consumption.

We remain confident in the primary markets we serve: transportation, construction and agriculture.

GDP growth and government stimulus programs in certain of our global markets will drive demand for the commercial vehicles needed to deliver goods and materials to harvest crops, support infrastructure needs and for construction equipment to build the roads, bridges, ports and infrastructure that accompany urban expansion.

We supply and support the OEMs that build the machines that will meet these growing needs, and we are working to ensure we continue to provide each of our OEM customers with highly differentiated value-adding cab systems and components as demand for their product grows.

As you may know, we introduced our long-term strategic plan, CVG 2020, in the third quarter of last year.

As a reminder, CVG 2020 is a roadmap by product, geographic region and end market to guide resource allocation and other decision-making to achieve our long-term sales and profit growth goals.

The primary financial goal of CVG 2020 is to deliver top quartile total shareholder return.

We are focused on the key initiatives due to the enablers of CVG 2020, including margin enhancement and product innovation year by year over the term of the strategy.

We have undertaken efforts to maximize our aftermarket sales opportunities in 2015.

Our product line managers continue to identify global opportunities, and we're encouraged by the progress that's been made, which is in line with our CVG 2020 strategy with new product and customer programs on track to yield the planned growth.

We have established a centrally led procurement organization that is driving best practices throughout our supply chain and across all of our facilities.

We are in the process of institutionalizing an operational excellence program based on Six Sigma principles and disciplines.

A number of initiatives were developed and deployed during the latter half of 2014.

By way of example, global purchasing logistics renegotiated terms of supply with a number of key suppliers, generating significant benefits for CVG over the next few years.

In addition, the Company benefited from the consolidation of global commodity suppliers, for example reducing the number of fastener suppliers suppliers from 28 down to three.

So with respect to our CVG 2020 goals, we intend to allocate resources consistent with our global market share objectives in our core and complementary product portfolios while improving margins over the period.

As we drive topline growth, the Company will be sharply focused on margin enhancement and improved profitability throughout the period.

We expect the combination of topline growth and the cost efficient, value-creating structure to deliver margin improvement year over year.

In this regard, we will continue to focus on operational excellence, global sourcing, and customer-focused product design engineering.

We intend to set the industry standard for quality, productivity and efficiency in our facilities.

Also, as we've mentioned previously, although our long-term strategies weren't based on organic growth, we've now ruled out the possibility the possibility of opportunistic acquisitions.

We will explore acquisition opportunities which supplement our product portfolio, add value-creating resources and enhance our ability to serve our customers in our geographic end markets.

In recent months, we've received question surrounding the decrease in crude oil prices and how that may impact our business.

Generally, there is a lag in time between changes in commodity prices and the benefits realized by companies, and that's true of CVG as well.

We have not seen any material benefit through the end of 2014, although we view the change in crude oil prices as favorable overall, leading to increased consumer buying power which may lead to more freight tonnage and thus requiring the production of more commercial vehicles.

As with commodity price changes, we continue working through changes in materials prices impacted by oil, and we are working closely with our customers to share in any cost savings.

We are making progress in our journey to enhance CVG's overall competitiveness in the global marketplace to improve our financial performance for the long-term and to deliver top quartile shareholder return.

We understand that achievement of our objectives is the result of offering our customers best-in-class products and services that enable their success.

We will be successful only if our customers are successful.

To close out my comments today, I want to acknowledge our Global Truck and Bus team.

Recently, our National Seating team was awarded Diamond Supplier Status by Navistar.

Diamond Supplier Status is Navistar's highest recognition of supplier excellence, and earnings award places CVG's award-winning Seating group in the top 2% of suppliers who have shared this elite honor.

To compete for this award, suppliers are expected to exceed standards of excellence in quality, delivery, cost and innovation, as well as provide world-class customer service.

This award recognizes outstanding performance by CVG employees involved in truck seating, customer support and manufacturing.

It's a team dedicated to producing a best-in-class seat product.

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

Thank you, Rich.

As Rich mentioned, and as compared to the fourth quarter of 2013, our financial results continue to benefit from increased build rates by North American medium- and heavy-duty truck OEMs and to a lesser extent penetration of our Global Construction and Agriculture end markets.

Consolidated fourth-quarter 2014 revenues were $211.9 million compared to $183 million in the prior-year period, an increase of almost 16%, primarily resulting from the increased truck production in North America and increased sales into the North American construction and agriculture markets we serve.

Operating income in the fourth quarter was $9.5 million compared to operating income of $8 million the prior-year period.

This increase in operating income reflects the increased sales and an improvement in our gross profit margin from 11.3% to 12.6%, offset by an increase in selling, general and administrative expenses from the prior-year period.

SG&A for the fourth quarter was $16.9 million compared to $12.3 million in the prior-year period.

You may recall that SG&A in the prior-year period benefited from temporary cost savings from a reduction in force and other cost reductions.

We've since backfilled that spend with more value accretive activities.

Net income was $4.2 million in the fourth quarter or $0.15 per diluted share compared to net income of $1.1 million or $0.04 per diluted share in the prior-year period.

Net income in the fourth quarter reflects an income tax benefit of $0.1 million compared to an income tax provision of $1.6 million in the prior-year period.

The income tax benefit in the fourth quarter resulted primarily from the reduction in tax valuation allowances in certain foreign subsidiaries.

Shifting now to full-year 2014 financial results.

Revenues for fiscal-year 2014 were $839.7 million compared to $747.7 million for the prior-year.

This was an increase of $92 million or 12%, primarily resulting from the increased truck production in North America and increased sales in the North American construction and agriculture markets.

Operating income for the full year was $33.7 million compared to operating income of $6.4 million in the prior year, an increase of $27.3 million.

On an adjusted basis, that is on the basis adjusted for special items called out in prior earnings releases and as more fully described in Appendix A to our fourth-quarter earnings release, adjusted operating income increased $19.5 million.

This represents adjusted operating income pull-through of 21%, which is within the range we expect.

This improvement in operating income resulted in part from the increase in sales in 2014, but also in an improvement in our gross profit margin from 10.7% in 2013 to 12.8% in 2014.

Net income was $7.6 million for fiscal year 2014 or $0.26 per diluted share compared to a net loss of $12.4 million or minus $0.44 per diluted share in fiscal year 2013.

An income tax provision of $5.1 million was recorded for fiscal-year 2014 compared to an income tax benefit of $2.3 million for fiscal-year 2013.

With respect to our 2014 income tax provision, we implemented tax planning in the fourth quarter that resulted in a reduction in the effective tax rate.

The effective tax rate for the year was about 40% and was lower as a consequence of this tax planning than it otherwise would have been.

It was achieved in part by way of the release of almost $4 million in tax valuation allowances and two foreign subsidiaries.

Furthermore, as a consequence of this tax planning, we converted certain of our domestic corporations into LLCs and, therefore, expect to realize a reduction in our cash tax payments beginning in 2015.

As an aside, we modeled an effective tax rate of 45% in 2015.

Having said that, please know that our effective tax rate is sensitive to geographic profile of our pretax earnings.

For full-year 2014, depreciation was $16.7 million, amortization was $1.5 million and capital expenditures were $14.6 million.

In 2015, we anticipate being cash accretive even as we increase investment in our facilities, equipment and technology for sales growth, operational excellence and other activities, some of which are specific to CVG 2020.

Our 2015 business plan contemplates as much as $26 million in capital spending.

We finished the quarter with $70 million of cash and $37 million of availability from our ABL facility and, therefore, liquidity of over $100 million.

As a consequence of topline growth and improved financial performance over the last four quarters, our leverage ratios continue to improve.

In the fourth quarter of 2014, we established two reportable segments, the Global Truck and Bus or GTB segment and the Global Construction and Agriculture or GCA segment.

Each of these segments consists of a number of manufacturing facilities.

Generally, the facilities in the GTB segment manufacture and sell seats and seating systems, trim systems and components, wipers, mirrors, structures and other products into the medium- and heavy-duty truck and bus markets.

And generally, the facilities in the GCA segment manufacture and sell wire harnesses, seats and other products into the construction and agriculture markets.

Both segments participate in the aftermarket.

Certain of our manufacturing facilities manufacture and sell products through both of our segments.

Each manufacturing facility that sells products through both segments is reflected in the financial results of the segment that have the greatest amount of sales from that manufacturing facility.

As regards our segment financial results, revenues for the GTB segment for the fourth quarter of 2014 were $140.1 million compared to $114.7 million for the prior-year period, an increase of 22%, primarily resulting from increased medium- and heavy-duty truck production in North America.

Operating income for the fourth quarter was $16.2 million compared to operating income of $10.1 million for the prior-year period.

This increase in operating income resulted primarily from the increase in sales, partially offset by $0.6 million of costs related to the closure of our Tigard, Oregon facility.

For fiscal year 2014, revenues for the GTB segment were $534.1 million compared to $473.2 million in the prior year, an increase of 13% primarily resulting from truck production in North America.

Operating income was $51.2 million compared to operating income of $30.1 million in the year.

This increase in operating income primarily resulted from the increase in sales.

Operating income was also impacted by closure costs totaling $1.3 million associated with the closure of the Tigard, Oregon facility, as well as a $0.8 million loss on the sale of our Norwalk, Ohio facility.

Operating income in 2013 was impacted by asset impairments totaling $2.7 million.

Shifting now to the GCA segment, revenues in the fourth quarter of 2014 were $74.8 million compared to $70 million in the prior year, an increase of 7% primarily resulting from increased sales into the North American construction and agriculture markets we serve.

Operating loss in the fourth quarter was $1.6 million compared to operating income of $2.3 million for the prior-year period.

The operating loss was primarily a result of reduction in gross profit margin as a consequence of foreign currency exchange transaction costs we incurred, but also SG&A investments associated with CVG 2020.

For fiscal year 2014, revenues for the GCA segment were $317.2 million compared to $282.8 million in the prior year, an increase of 12% primarily resulting from the increased sales in the North American construction and agriculture markets.

Operating income was $7.5 million compared to operating income of $4.9 million in the prior year.

This increase in operating income resulted primarily from the increase in sales, partially offset by foreign currency exchange transaction costs.

As regards to CVG 2020, the overarching financial goal of CVG 2020 is to deliver top quartile total shareholder returns.

Accordingly, we intend to realize sales and EBITDA growth rates commensurate with companies that deliver top quartile total shareholder returns.

And more specifically, we intend to grow sales to $1.2 billion to $1.3 billion over the next six years.

The compound annual growth rate from about 6% to about 8%.

With respect to EBITDA growth over the same period, we expect a compound annual growth rate of from 13% to about 17%.

As Rich mentioned, we are deploying resources to achieve our long-term strategic goals.

These investments include resources for various margin enhancement initiatives and product innovation, and capital expenditures for our manufacturing facilities and for sales growth and other initiatives and perhaps to enhance our manufacturing footprint.

Notwithstanding these investments, we intend to improve earnings and margins in the near term.

That is in 2015 and 2016.

We expect CVG 2020 to have a significant impact on our growth and financial performance in the coming years, and it's encouraging to see your margins and financial leverage improving.

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

(Operator Instructions) Mike Shlisky, Global Hunter.

Good morning.

This is actually Leigh Pressman on the line for Mike Shlisky.

How are you?

Good.

Thanks.

So I just have a couple of questions.

I just want to start out with the Class 8 truck outlook.

What are the chances that the industry could exceed the higher end of your range given that so many build classes have already been filled for the next few quarters?

You've been seeing some good strength in the industry.

Hey, Pat Miller, the President of Global Truck and Bus, has joined us for the call, so I'll turn that question over to Pat.

So today, I think we are on record at 290,000 to 310,000.

That is what we've got out there.

Some of the public forecasting services are higher than that.

One is at 340,000, and one is at 325,000.

What we see is there's a strong backlog today.

There's a desire to build at higher rates from the OEMs, and we are probably a little bit conservative where we are at.

But we are also concerned with whether -- not ourselves -- but whether the rest of the supply base can support the OEM's desire to build at higher rates.

So, that's part of the reason we've left our build projections where they are.

I think we're waiting to see how things go as the OEMs continue to try to ramp up their build rates and whether they are able to accomplish that.

If they are able to accomplish that, then we can support those higher build rates at CVG.

Okay.

That's great.

Thanks.

And then my next question is, with respect to the new segments, can you give us a little color about any seasonality you expect with respect to revenue and margins for the coming year?

Hi, it's Tim.

There are -- let me, first of all, address the truck and bus.

You know, there is generally some seasonality a little bit around the summer time and then around the holidays at the end of the year as things wind down a little bit.

But there isn't a tremendous amount of cyclicality other than that.

So maybe just a little bit of a softening in the summer, just a little tiny bit, and then trailing off a little bit later in the year and picking back up very quickly at the beginning of the year.

With respect to our construction and agriculture segment, really the only meaningful amount of cyclicality here is in the wire harness business.

There is a little bit of a ramping up in the spring season around that time.

But other than that, there's not a whole lot of cyclicality that we see in that market.

Okay.

That's great.

Thanks.

I'll leave it there.

(Operator Instructions).

With no further questions at this time, I would now like to turn the call back to Mr. Richard Lavin for any closing remarks.

Yes, thank you.

In closing, I'd just say we are looking forward to sharing information about our quarterly results going forward and also the results that we're seeing from CVG 2020, our long-term strategy.

Thanks to everybody for joining the call this morning.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.