Commercial Vehicle Group Inc (CVGI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-one 2015 Commercial Vehicle Group earnings conference call.

My name is Emma, and I will be your operator for today.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now I'd like to turn the call over to Mr. Terry Hammett, Head of Investor Relations.

Please proceed.

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

Rich Lavin, our CEO, will provide a companywide update; and Pat Miller, President of Global Truck and Bus, will provide an update on his business segment.

Tim Trenary, our CFO, will comment on first-quarter 2015 results.

We will also provide commentary on our long-term strategy, CVG 2020, and answer questions.

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

It may contain forward-looking statements including but not limited to expectations for future periods regarding market trends, cost-saving initiatives, 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.

Thank you, Terry.

Good morning, everybody, and welcome to our call.

We are pleased this morning to report that our first-quarter 2015 revenues improved by $22.2 million or by 11% over the prior-year period.

Operating income was $11.2 million in the first quarter, a significant increase over the $5.4 million of operating income in the first quarter of 2014.

After adjusting for special items in each period, operating income pull-through of the incremental year-over-year sales was well within the range we expect and was 23%.

Our earnings per share for the first quarter were $0.12 as compared to a loss of $0.02 in the first-quarter 2014.

These results illustrate our ability to improve near-term earnings and margins even as we continue to invest in our long-term strategy, CVG 2020.

North American medium- and heavy-duty truck build rates remained strong in the first quarter of this year.

Class 8 truck production was over 79,000 units in the quarter.

We believe solid truck fundamentals, including pricing, equipment utilization, and used truck values, coupled with continued economic growth in the United States, supports strong truck demand for the full year.

Accordingly, we are increasing our 2015 Class 8 truck production forecast to a range of 300,000 to 320,000 units.

Pat Miller will provide more color on this momentarily.

Our global construction and agricultural sales increased 3% period-over-period before giving effect to the impact of foreign currency exchange on our business.

There is every indication that the strength of the US dollar vis-a-vis most other global currencies will continue in the near-term.

We therefore expect foreign currency exchange to adversely affect our sales and earnings throughout 2015.

Generally, global market conditions in heavy construction equipment have been disappointing.

This is especially true in China, where excavator sales, a key element of our construction equipment end market in China, may be down as much as 10% or more this year.

In the first quarter we did benefit somewhat from our business into Japan, where a weakened Japanese yen drove increased equipment exports and build rates.

We are expecting modest growth in the US construction equipment build in 2015, and flat to somewhat reduced US agriculture equipment build.

Agriculture is a market that offers significant growth potential for us domestically and abroad, irrespective of market strength, inasmuch as our penetration of this market is well below levels we believe we can achieve.

Indeed, we believe this market represents the single biggest area of potential growth for CVG globally.

Our construction and agriculture global product line managers are therefore working diligently to expand our product offerings, improve our sales efforts, and increase the percentage of the available markets we are addressing with our offerings.

We are committed to allocating the resources needed to increase our market share in both construction and agriculture.

As regards the economic outlook for China and India, two important growth markets for us, both countries continue to develop economic policies to stimulate and accelerate growth.

Most recently, China's Central Bank reduced interest rates and increased money supply to boost the economy.

GDP growth in China is projected to be 7% for the year.

And the introduction of new infrastructure stimulus is possible before year-end.

In India, the Modi government is considering various economic development projects to stimulate economic growth.

We have not factored increased growth in China and India into our full-year models at this stage.

But we are guardedly optimistic that we will see incremental GDP growth and industry improvement in both countries.

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

The overarching financial goal of CVG 2020 is to deliver top-quartile total shareholder returns.

We are keenly focused on the key initiatives that are the enablers of CVG 2020.

As those of you who are familiar with CVG 2020 will recall, inherent in the strategy is the deployment of resources for various margin enhancement initiatives and for product innovation.

Expansion of our product lines and enhancement of our go-to-market capabilities are key to the successful execution of CVG 2020, and we are making significant progress in both areas.

In addition, we are investing in equipment to upgrade key manufacturing facilities, and we are driving Six Sigma-based operational excellence throughout our operations to improve efficiencies in costs and expand margins.

Notwithstanding these investments, we have a demonstrated ability to deliver improved earnings.

Operating income margin has improved in each of the past four quarters.

We remain confident in our ability to deliver CVG 2020 and, at the same time, meet or exceed our near-term profit goals.

We are making progress in our journey to enhance CVG's overall competitiveness in the global marketplace, to improve our financial performance in 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 some exemplary achievements by the team of CVG.

The global construction and agricultural team in Shanghai was awarded the SQEP Gold Medal status for 2014 by a global OEM and one of our largest customers in the construction market.

SQEP Gold supplier status is one of their highest recognitions of supplier excellence.

(technical difficulty) this recognition from this important customer.

Although comparatively small, we've got several important business wins by our Asia-Pacific team in China, Japan, and Korea with key OEMs.

The Global Truck and Bus segment was recently awarded a new seat program by another important CVG customer, Navistar.

This seat program is generally for vocational trucks in the Class 5 to 8 market.

Pat will provide more color for you on that deal in a moment.

And finally, our aftermarket business, a critical part of our overall offering, is expanding.

Again, more on this from Pat Miller.

And, with that, I will turn the call over to Pat Miller, President of Global Truck and Bus.

Thanks, Rich.

I would like to start with some thoughts on the North American truck build rate.

The build rates and our sales remained strong in Q1, and most indications are that high build rates will continue through the end of the year.

As Rich mentioned earlier, we are estimating the Class 8 North American truck production for 2015 will be in the 300,000 to 320,000 unit range, while others estimate a build rate approaching 340,000 units.

So 2015 could be another strong build year for North American trucks.

There were some market indicators showing degradation, such as the OEM truck orders dropping below expectations in March and the backlog lead times shrinking.

In the past these may have been indications of weakening market forces.

The market commentary is that this is mostly due to the order slots being filled up for this year, and we agree with that assessment.

Bottom line is we are managing our business with a more conservative view of Class 8 North American production levels in 2015.

I have been asked about our ability to produce at levels commensurate with historical highs.

Please note that CVG has adequate manufacturing capacity to meet high demands, even if production demand increases to levels seen in 2006.

The main potential risk to 2015 production levels in North America are weather-related supply chain interruptions and interruptions due to other suppliers to the OEMs not associated with CVG.

We continue to monitor these risks as well as our global footprint as it relates to current and future production levels.

As I am sure you can appreciate, CVG continually works to develop a pipeline of ongoing business.

Given the lifecycle of truck platforms we bid on, business wins in our pipeline may take a number of years to be reflected in our operating results and, therefore, our bottom line.

Additionally, we are not usually able to discuss publicly many of the programs until our customer has announced them first.

We have had some meaningful business wins of late.

First, starting in 2014, CVG launched and ramped up production of a new seat program for the Navistar NGV platform, targeted mostly for vocational trucks in the Class 5 through 8 market.

We have been the standard position at Navistar for air seats for more than 17 years, and this new seat program represents conquest business for CVG in the range of $10 million to $15 million per year.

This win solidifies strong partnership with Navistar that both companies continue to foster.

This program entails shipping a new family of seat models to Navistar's locations in Escobedo, Mexico; and also Springfield, Ohio.

Next, I want to touch on our North American aftermarket business.

As you know, we produce the top two seating brands North America for the truck and bus segment: National Seating and Bostrom Seating.

We continue to drive growth by improving our product breadth and channel penetration through the launch of derivative products and also by expanding into new product segments.

This effort has resulted in our aftermarket business in North America being up 18% year over year for Q1.

CVG recently participated in the Mid-American Truck Show, with both an aftermarket and also an OEM booth.

Our booth illustrated our product offerings, showing the different value propositions in the various jurisdictions we operate.

At the Mid-America Truck Show, National Seating launched a new refuse seat product targeted specifically to the waste disposal and vocational market.

We developed this product by working directly with large waste refuse fleets to create a seat that meets their unique applications.

Waste disposal represents about 3% of the truck population, or 150,000 trucks on the road.

These vehicles have higher replacement cycles due to the severity of the application.

Our newly-launched refuse seat is water- and stain-resistant, allows easy ingress and egress, without compromising the ergonomic benefits found in our traditional seats.

I also want to mention that we are introducing the Bostrom LTSS suspension seat product in May of this year.

The LTSS suspension seat is specifically engineered for the Class 3 through 5 medium-duty, smaller cab-over-engine trucks.

This growing market segment is led by Japanese OEMs like Isuzu and Hino, with new models coming from the domestic OEMs.

Previously, this market segment utilized standard static seats.

But as the models are introduced into increasing applications, we see a demand from professional drivers for compact, low-profile suspension seats.

And this plays right into our strengths.

Lastly, I want to comment on the new truck mattress product we codeveloped and launched last year in partnership with Serta mattress.

It is a departure from the traditional, low-quality, basic mattress found in most trucks today; and it integrates Serta's Cool Action memory gel foam's technology to give the driver the same comfort level enjoyed at home.

We are just starting to see market penetration; in 2015 Q1, year-over-year sales were up 37%.

We expect this market segment will continue to grow as we ramp up our marketing efforts.

These examples from our aftermarket team illustrate a very active effort to enhance and drive our aftermarket business, which continues to be a vibrant part of our Company.

And with that, I'm going to turn the call over to Tim Trenary for comment on our financial performance.

Thanks, Pat.

Consolidated first-quarter 2015 revenues were $220.3 million compared to $198.1 million in the prior-year period, an increase of 11%.

This improvement in sales was achieved notwithstanding foreign currency exchange rate, or FX, headwind.

FX translation adversely impacted our top line in the first quarter by $5 million.

Before giving effect to this FX burden on our top line, first-quarter sales growth as compared to prior year was 14%.

Setting aside the burden of FX translation on our consolidated revenue in the first quarter, substantially all of the top-line growth was in our Global Truck and Bus segment, which continues to benefit from the robust truck production in North America.

Operating income in the first quarter was $11.2 million compared to operating income of $5.4 million in the prior-year period.

Pull-through of operating income on year-over-year incremental sales was 26% in the first quarter.

This pull-through is in excess of what we generally expect and was achieved notwithstanding the adverse impact on our consolidated results of FX translation and FX transaction costs in certain of our foreign affiliates.

On the other hand, and as I will more fully describe in a moment, year-over-year pull-through benefited somewhat from special items.

Excluding the impact of special items, adjusted operating income pull-through in the first quarter was 23%, and therefore well within the range we expect.

A profit improvement continues to benefit from SG&A cost discipline.

SG&A in the first quarter of 2015 was $17.5 million compared to $18.5 million in the prior-year period, even as we invest in value-accretive activities inherent in CVG 2020.

FX translation accounts for approximately $0.3 million of the $1 million decrease in SG&A year over year.

Net income was $3.6 million in the first quarter or $0.12 per diluted share compared to a net loss of $0.5 million or loss of $0.02 per diluted share in the prior-year period.

Net income in the first quarter reflects an income tax provision of $2.5 million or an effective tax rate of 41% the pretax income.

This effective tax rate is somewhat better than our full-year estimated effective tax rate of 45%.

For the first-quarter 2015, depreciation was $4.2 million; amortization, $0.3 million; and capital expenditures were $2.9 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.

In the first quarter of 2015, cash flow from operations approximated $16 million.

We finished the quarter with $81 million of cash and $37 million of availability from our ABL facility; and, therefore, liquidity of over $115 million.

Our leverage ratios continue to improve as financial performance improves at CVG.

As regards our segment financial results, revenue for the Global Truck and Bus segment in the first quarter of 2015 were $145.8 million compared to $121.7 million for the prior-year period -- an increase of 20%, largely as a consequence of the medium- and heavy-duty truck production in North America.

Because GTB's operations are by and large domestic, FX translation negatively impacted GTB sales by only $0.6 million.

GTB operating income in the first quarter was $14.1 million, and the operating income margin was 9.7%.

This compares favorably to the prior-year period operating income and associated margin of $8.3 million and 6.8%, respectively.

That's almost 300 basis points of year-over-year margin improvement.

This improvement was, however, favorably impacted somewhat by special items in the first quarters of 2014 and 2015.

More specifically, first-quarter 2015 results include $0.7 million of costs associated with the impending closure of our Tigard, Oregon, facility.

First-quarter 2014 results included a severance charge of $0.5 million at the Tigard facility and an asset impairment charge of $0.8 million from the sale of our Norwalk, Ohio, facility.

Before giving effect to these special items, operating income margin for GTB improved by a little over 200 basis points year over year.

First-quarter 2015 GTB operating income pull-through on the incremental sales was 24%, notwithstanding the aforementioned $5.7 million in closure costs at the Tigard facility.

This pull-through is at the upper end of the range we expect for Global Truck and Bus.

Shifting now to global construction and agriculture segment, revenues in the first-quarter 2015 were $74.5 million compared to $76.4 million in the prior year, a decrease of 2%.

FX translation negatively impacted GCA sales by $4.4 million in the first quarter.

Setting aside this burden on GCA's top line, quarter-over-quarter sales increased $2.5 million or by 3%.

Operating income was $3.6 million for the current and prior-year periods.

Not only was GCA segment operating income adversely affected by FX translation, but it was also adversely affected by FX transaction costs arising from certain customer and supplier commercial arrangements.

To the extent practicable, we are modifying these commercial arrangements to mitigate the impact transaction costs may have on our financial results in the future.

That concludes my comments today regarding our first-quarter financial results.

As we have highlighted in the past, our objective is to grow earnings even as we bring CVG 2020 to life.

To that end, and as Rich has pointed out, this was the fourth consecutive quarter of improved operating income margin for CVG.

We will now open the call for questions.

(Operator Instructions) Mike Shlisky, Global Hunter Securities.

Just wanted to touch first briefly on something I noticed at the Mid-America Truck Show back in March.

I got the sense that some of the OEMs out there are shifting, or certain customers are shifting to more comfort and luxury within the cabin as they try to entice more drivers to join their fleets, I guess, given the tight market out there to find people to actually operate trucks.

I was kind of wondering if you have seen any kind of increase in your ASP or any shift up in the types of seats that are -- I guess the kind of seats that are being ordered for your trucks in the last few months and in the next few months.

Well, this Pat Miller, so I will take a stab at that.

I don't actually have a quantifiable number that I can give you today on that dynamic.

We have certainly seen, anecdotally, feedback from the fleet owners and fleet maintenance directors that speak specifically to what you are saying.

They look at the cost of bringing new drivers in, and the turnover and training costs, and it is a very easy method to attempt.

So I have seen some specific examples which benefited us, but I don't know that I can really quantify that for you.

We have heard the same thing that you've heard, and we've heard that directly from some of the sources.

Perhaps a little more broadly, then, because there is some kind of noise in your truck and bus numbers, given that you do sell outside the US -- broadly speaking, are you seeing any increase in content per vehicle over the last few months?

It appears as though your growth rates have outpaced the market by a little bit.

So I just wanted to see how that is going for you.

Well, I think I mentioned some of the new programs that we have added to our portfolio during my part of the discussion.

Part of that helps us, of course, in the growth rates.

As far as content per vehicle, I think a lot of that tends to be driven by the sleeper/day cab mix, which has been beneficial for us in the first part of the year.

We are seeing a -- if you think about it, when we have got all of the sleeper and bunks, and the larger flooring, larger headliners, interior panels in a sleeper truck, they also tend to get better, higher-featured seat components.

And so a sleeper/day cab mix for us is a big driver of content per vehicle.

Got it.

And then I wanted to also touch on -- I think you had mentioned you had some new program wins in Asia.

I think you said Korea, Japan, and China, if I'm not mistaken.

Is there any way we can get a little more color as to what types of products those are; or perhaps, if you can, the kinds of components you are providing there?

Is it in very low margin seats, high-margin products?

Any amount of color you can give us around what you see in those contracts over the next few quarters, I would appreciate it.

Yes.

This is Rich Lavin.

The winds were largely, in the construction industry, spread across a couple of Asia-Pacific multinational OEMs.

And these were largely seat sales.

As I mentioned, they were comparatively small deals.

But strategically they were very important wins for us, because it enabled us to strengthen our relationship with those OEMs.

So relatively minor sales, but strategically very important for us going forward.

Okay.

And then, finally, one more from me, if you wouldn't mind.

I just wanted to get your thoughts on 2016 for the truck markets.

If we are running out of build slots here in 2015, do you feel good about how things might look for next year, just based on extra demand from this year alone?

And are the truck OEMs asking you to make any kind of investments or changes for next year's trucks that are going to be important?

Okay, so, I have to be honest.

We have not really done any sort of formal forecasting for 2016 at this stage in the year.

We are waiting to see how the year plays out, and if the OEMs will build all the planned orders.

The build slots are filling up, as has been mentioned by several other groups; we concur with that.

We can see the numbers.

I think that telling issue for us will be when the order season starts back up in the fall.

That will help us determine what 2016 is going to look like, as well as if there is any supply disruption.

So we have mentioned some things about supply disruptions on some of the critical-type subsystems that we don't supply.

But those in the past have been limiting factors as to whether the OEMs can achieve levels that they would like to achieve in the time frame they would like to achieve them.

So if they are able to achieve their builds, (technical difficulty) don't get as much carryover into 2016.

And I haven't -- we haven't really put any numbers to 2016 yet.

So we are working hard on making 2015 a good year.

So, then, is it safe to say that if your forecast is right, then there's even more demand in 2016, because there is carryover production.

Is that how it is going to play out, possibly?

It could, I suppose.

Okay.

Great.

Well, guys, I will leave it there.

Thank you so much for all of the color.

Appreciate it.

Thank you.

Thank you.

You have no more questions at this time.

(Operator Instructions)

From the CVG end -- this is Rich Lavin again.

I would just like to thank everybody once again for calling in.

And we look forward to sharing our second-quarter results and developments in our business with you in a couple of months.

Thanks very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.