Commercial Vehicle Group Inc (CVGI) 2015 Q2 法說會逐字稿

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

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Terry Hammett, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Amanda, and welcome, everyone, to the conference call.

Rich Lavin, our CEO, will provide a Companywide update and Joseph Saoud, President of our global construction and agriculture segment, will provide his initial thoughts and an update on his business segment.

Tim Trenary, our CFO, will comment on our second-quarter 2015 financial 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 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 covenants compliance and liquidity, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

I will now turn the call over to Rich.

Thank you, Terry.

Good morning and welcome to our call.

We are pleased to report another strong quarter for Commercial Vehicle Group.

Revenues continue to benefit from robust North American medium- and heavy-duty truck production, but were adversely affected by the relative strength of the US dollar.

Operating income was $11.6 million in the second quarter, a 29% increase over the $9 million of operating income in the second quarter of 2014.

Operating income pullthrough in the second quarter once again met our expectations.

Our earnings per share for the second quarter were $0.11, as compared to $0.09 in the second-quarter 2014.

These results illustrate our ability to improve near-term earnings and expand margins, even as we invest in the talent, innovation, and initiatives important to our long-term strategy CVG 2020.

North American medium- and heavy-duty truck build rates remained strong in the second quarter of this year, and market forecasting services, such as FTR and ACT, are projecting that truck build rates will finish out the year strong.

By way of example, FTR is forecasting Class 8 2015 production on the order of 334,000 units, an increase of 13% over 2014.

Importantly, although it appears as though production may have peaked, the order backlog remains healthy.

This suggests a good 2016.

FTR projects Class 8 production on the order of 290,000 units in 2016, still markedly above generally accepted normal build rates of 250,000 to 260,000 units per year.

We tend to focus our commentary on the heavy-duty truck market, but we also participate in the medium-duty truck and bus markets and build rates have been good in these markets.

FTR is forecasting the 2015 medium-duty truck and bus production volume at 194,000 units, an 8% increase compared to 2014, and [2016] production of 200,000 units.

So early indications are that 2016 will be another good year for North American medium-duty truck and bus OEMs and their suppliers.

These forecasts reflect solid truck fundamentals in North America as we consider our business plan for 2016.

More specifically, I would highlight manufacturing activity conducive to continued growth, a moderating but still positive growth rate for freight, aging fleets, and fleet owners who generally have a favorable business outlook and the financial capability to upgrade fleets.

We will have a better basis for projecting the behavior of the North American heavy- and medium-duty truck industry in 2016 as we see order and build rates in September and October, but at this point we are reasonably optimistic about the North American truck industry in 2016.

We spend considerable time developing our truck and bus business in North America, and for good reason.

It is currently our largest market, one in which the Company is strongly positioned as a result of a long track record of delivering products and service solutions that meet and exceed our customers' expectations.

We will continue to invest in this key market and to focus on supporting our customers.

At the same time, we have developed plans as a part of CVG 2020 to profitably grow our truck and bus business outside of North America, with particular focus on Europe and Asia.

Our product line managers in the global truck and bus division have developed and continue to develop product configurations that meet the unique requirements of customers in Europe and Asia, and we're strengthening our service and go-to-market capabilities to ensure we fully understand and meet the unique needs and expectations of customers outside of North America.

This market development effort is a key part of our long-term strategy and we are confident the steps we are taking will deliver the profitable growth we are planning on.

The outlook for the global construction and agriculture markets we serve is not nearly as optimistic.

These two markets represent about 24% and 2%, respectively, of CVG's total sales, so when these two markets are weak, we are negatively impacted, but the effect is not devastating to our overall financial outlook.

Global market conditions in heavy construction equipment have been disappointing and will likely remain so in the near term.

This is especially true of China where excavator sales, a key element of our construction equipment end market in China, are down about 40% for the first five months as compared to the same period last year.

And recent guidance from equipment dealers and other sources is for a less-than-positive outlook for US construction equipment for the remainder of 2015.

Furthermore, we expect the US agriculture equipment market to remain soft through the end of 2015 and into 2016.

But these end markets, global construction and agriculture, which are about a quarter of our sales now, represent a tremendous opportunity for our Company, notwithstanding the headwinds we are experiencing at the moment.

Our construction and agriculture product line managers are working to expand our product offerings and increase our go-to-market and service capabilities in all regions to better address the needs of customers in these target markets.

This is a fundamental aspect of our strategy.

We are committed to developing products that meet and exceed our customers' expectations in all regions of the world and stepping up our sales and service capabilities that both support our customers and drive profitable growth in these two key global market segments.

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

We are well positioned to follow our global customers into these markets, and as regards Chinese and Indian OEMs, we are working to deepen our relationships with these important emerging-markets customers.

There is no question the OEMs based in these emerging markets appreciate the quality of our engineered products and the performance differentiation of many of our products.

Having said that, we recognize that both India and China are price-sensitive markets and that to be successful in both the short and long term, we must develop product lines that effectively address customers' needs at two to three different price points.

Our product line managers in truck, bus, construction, and agriculture are in the process of introducing product configurations that will meet customers' price and value expectations at different levels and also create differentiation versus locally designed and manufactured products.

There is no doubt over time that customers in China and India will move toward the premium end of our product line.

It has happened in other industries and it will happen in ours.

Our plan simply is to offer products that meet different price/value expectations and to impress on customers the value of moving to the premium end of our product lines over time.

As these markets evolve and our customers increasingly appreciate the value inherent in premium engineered products, demand will certainly shift from the value to the standard and to the premium end of the marketplace.

At that point, we expect that these early days of developing OEM customer relationships will be rewarded with increased sales and the associated profits.

We're almost a year into our long-term strategic plan, which was introduced in the third quarter of last year.

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

Over the past year, we have been keenly focused on the key initiatives that are the enablers of CVG 2020.

As those of you who are familiar will recall, inherent in the strategy is the deployment of resources for product innovation, expansion of our product lines, deepening our go-to-market capabilities, and acceleration of various margin enhancement initiatives.

We're making significant progress, as exhibited by our quarter-over-quarter margin improvement.

In addition, we continue our investment in equipment to upgrade key manufacturing facilities domestically and abroad and we are driving Six Sigma-based operational excellence throughout our operations to deliver improved safety, productivity, and efficiency.

The early returns from our Six Sigma commitment have been quite encouraging and we are confident we will see the types of performance improvements we anticipated when we embarked on the Six Sigma journey six months ago.

As described in introducing our long-term strategy, we intend to deliver improved earnings even while investing in the long-term profitable growth of our Company.

To that end, operating income margin has improved in each of the past five quarters.

One year into our strategy, we remain confident in our ability to deliver CVG 2020 while the same time meeting or exceeding our near-term profit goals.

At this point, I am pleased to say that joining us today on the call is Joseph Saoud.

Joseph joined Commercial Vehicle Group just last month as President of our global construction and agriculture segment.

Prior to joining CVG, Joseph distinguished himself in a 20-year career with Cummins, where he held a number of global operational and general management roles, including assignments in the United States, Mexico, and the Middle East.

He served most recently as the Vice President of Cummins and President of its filtration business unit.

Although Joseph has been with us for just a brief time, it has become clear that he will be a key contributor as a CVG leader.

This morning, he will comment on the construction and agriculture markets, as well as provide some initial thoughts regarding CVG today and near-term needs and opportunities for long-term profitable growth.

Before I hand the call over to Joseph, I want to acknowledge some exemplary achievements by some of our associates at CVG.

The global construction and agriculture team in the Czech Republic was awarded SQEP Platinum status in 2015 by a global OEM and one of our largest customers in the construction market.

SQEP Platinum supplier status is their highest recognition of supplier excellence and this represents yet another year this team has achieved recognition from this very important customer.

And our global truck and bus segment was recently selected to supply interior and exterior trim products for the JLG global telehandler program.

CVG and JLG have partnered on the design and launch of these products.

These products will be supplied to JLG and a number of Tier 1 suppliers affiliated with JLG in locations in North America and Europe.

And with that, I'm happy to turn the call over to Joseph.

Thank you, Rich, and good morning.

As Rich described, results for the construction and agriculture segment have been adversely affected by soft markets and the competitive strength of the US dollar.

Our teams have therefore worked diligently to flex down costs, while maintaining the momentum to deliver CVG 2020 and the growth attendant thereto.

In this tough market environment, flexing down costs is key.

But the team's actions to flex costs is but one part of the business equation.

Another very important element is the development of the topline.

It is clear to me in just the short time I have been with the Company that we are well positioned to address a larger volume of sales.

Our participation in these markets is immature as we are in the early stages of developing these two important end markets in our long-term strategy.

We intend to do that -- we intend to do just that by way of product innovation, enhancements in the manner in which we go to market, and other means.

This will, in turn, lead to the market-share gain and organic growth inherent in CVG 2020, thereby leveraging the cost structure we have in place to serve these markets and to deliver improved financial performance results.

In the short term I have been here, I have had the opportunity to review product lines and visit our manufacturing plants in the US, Mexico, and the United Kingdom and Czech Republic.

I met many bright, motivated, and passionate business associates and learned that there are many opportunities to grow our construction and agriculture business processes.

In the next few weeks, we will explore more deeply how best to position CVG's construction and agriculture segment for enhanced margin and topline growth.

I am looking forward to meeting our current and prospective customers to refine my understanding of their near- and long-term expectations of CVG.

I want to hear from them.

I want to better understand how best to address their needs and to further strengthen CVG's already strong relationships.

In short, our goal is to become a preferred supplier to the construction and agriculture market by offering innovative, value-enhancing products and services, coupled with a highly efficient cost structure and therefore competitive pricing.

We have some work to do, but that's okay.

We have a good foundation to build upon with clear pockets of excellence, well-known brands, strong OEM relationships, and a motivated and passionate team.

I am looking forward to it.

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

Thank you, Joseph.

Consolidated second-quarter 2015 revenues were $217.6 million, compared to $216 million in the prior-year period.

That's an increase of 1%.

The consequence of the relative strength of the US dollar and, as is the case with most US multinational corporations, foreign currency exchange rate headwinds, or FX, continue to burden our financial results.

FX translation adversely impacted our topline in the second quarter by $5.5 million.

Before giving effect to FX translation, second-quarter sales growth as compared to the prior-year period was 3%.

All of our topline growth was in our global truck and bus segment, which continues to benefit from the robust truck production in North America.

Global truck and bus revenues increased 12% over the second quarter of 2014.

Conversely, our global construction and agriculture segment sales reflect soft construction and agriculture markets generally globally.

Furthermore, our global construction and agriculture segment is more sensitive to FX impacts.

Operating income in the second quarter was $11.6 million, compared to operating income of $9 million in the prior-year period.

That's a 29% increase.

Pullthrough of operating income met our expectations for the second quarter.

We completed the closure of our Tigard facility and have successfully moved all production to our facilities in Saltillo, Mexico, and Concord, North Carolina.

Adjusted for costs associated with the closure of Tigard, our operating income margin in the second quarter was 5.6%, an improvement of 140 basis points over the second quarter of 2014 on, for all intents and purposes, flat sales quarter over quarter.

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

SG&A in the second quarter of 2015 was $17.6 million, compared to $18.7 million in the prior-year period, even as we invest in value-accretive activities such as talent, operational excellence, innovation, new product development, and other initiatives inherent in CVG 2020.

FX translation accounts for approximately $0.3 million of the $1.1 million decrease in SG&A year over year.

Net income was $3.2 million in the second quarter, or $0.11 per diluted share, compared to net income of $2.7 million, or $0.09 per diluted share, in the prior-year period.

Net income in the second quarter reflects an income tax provision of $3.3 million or an effective tax rate of 51%.

For the six months ended June 30, 2015, our effective tax rate was 46% and therefore consistent with our expectation of about 45% for the year.

CVG's effective tax rate is adversely influenced by a disproportionate amount of pretax earnings arising in North America, more specifically in the United States, and by deferred tax asset valuation allowances in certain of our foreign subsidiaries.

There is some risk that our effective tax rate could be higher than the 45% in our plan, inasmuch as the geographic profile of our pretax earnings has shifted somewhat to North America.

Depreciation for the second-quarter 2015 was $4.1 million, amortization, $0.3 million, and capital expenditures were $4.7 million.

We will make fewer capital expenditures in 2015 than we had originally planned.

You may recall that our original plan was to incur $26 million in capital spending in 2015.

We now project capital spending on the order of $19 million to $22 million.

Some of this reduction in spend from plan reflects more efficient acquisition of capital goods and the favorable impact of foreign currency translation, but some of the reduction reflects carryover into 2016 of capital spending planned for 2015.

We expect to be cash accretive in 2015, even as we increase investment in initiatives inherent in CVG 2020.

Cash flows from operations, net of cash flows from investing activities, for the six months ended June 30, 2015, was $20 million.

We finished the quarter with $89 million of cash and $37 million of availability from our ABL facility, and therefore liquidity of over $125 million.

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

Turning now to our segment financial results, and more specifically our global truck and bus segment, revenues in the second quarter of 2015 were $149.3 million, compared to $133 million for the prior-year period.

That's an increase of 12%, largely as a consequence of the continued strong 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 $0.8 million.

GTB operating income in the second quarter was $15.1 million and the operating income margin was 10.1%.

This compares very favorably to the prior-year period operating income and associated margin of $11.6 million and 8.7%, respectively.

This period-over-period improvement was somewhat affected by special items.

More specifically, second-quarter 2015 results include $0.5 million of costs associated with the closure of the Tigard facility.

Second-quarter 2014 results include a severance charge of $0.1 million at the Tigard facility.

Before giving effect to these special items, operating income margin for GTB improved by a little over 150 basis points period over period.

Second-quarter 2015 operating income pullthrough on the incremental sales met our expectations for the global truck and bus segment.

As regards our global construction and agriculture segment, revenues in the second quarter of 2015 were $68.4 million, compared to $83 million in the prior year, a decrease of 18%.

FX translation negatively impacted GCA sales by $4.7 million in the second quarter.

Setting aside this impact on GCA's topline, quarter-over-quarter sales decreased $9.9 million or by 12%, reflecting the softness in our construction and agriculture end markets.

Operating income was $2.8 million for the second quarter of 2015, as compared to $4.7 million for the prior-year period and the associated sales reduction for the quarter.

Not only was our GCA segment operating income adversely affected by the softness in the end markets and FX translation, but it was also adversely affected by FX transaction costs arising from certain customer and supplier commercial agreements.

To the extent practicable, we have modified these commercial arrangements and entered into currency hedges to mitigate the impact FX transaction costs may have on our financial results in the future.

That concludes my comments regarding our second-quarter financial results.

As we 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 fifth consecutive quarter of improvement in our operating income margin.

And with that, we will now open the call for questions, Amanda.

(Operator Instructions).

Mike Shlisky, Global Hunter.

Got a bunch of questions here.

I guess, first of all, just broadly speaking, what gave you the confidence to tick up your Class 8 forecast here?

I do recognize that some of the national forecasters also have a pretty robust forecast versus your prior forecast, but you have commented in the past that you could be seeing some constraints among other suppliers that hold up the process.

Are you hearing anything better now as far as how the industry is responding to pretty demanding environment for production of trucks?

Well, I think we are seeing a number of indicators in the market across the supply chain that really line up with, I would say, the more robust Class 8 production forecast for the balance of 2015.

So, we are confident enough, I think, to change our thinking regarding what we're going to see for the balance of the year.

As far as 2016 is concerned, as we mentioned our remarks, early indications are positive.

It looks like 290,000 is going to be the number that we go into 2016 with, but we are going to be smarter on that score in September/October as we see some of the order activity in those months, which typically would impact first-quarter build rates.

So, we are simply seeing things coming in line across the market that support the more robust outlook for the balance of the year.

Great.

And I just wanted to run through a few questions clarifying a couple quick things here.

First, can you guys maybe comment on the SG&A run rates that you've seen most recently this quarter?

Do you feel confident that that is going to continue for the rest of this year, at least?

Michael, it is Tim.

I think if you go back and look at -- let's use 2014 as a sort of benchmark or talking point.

I think last year the SG&A ran about $73 million, which was down a little bit from 2013, and if you take our spend on SG&A for the first half of this year and annualize it, it comes to a number that is pretty consistent with the spend from last year, the $73 million or so.

So, we expect that level of SG&A spend to remain pretty consistent this year with 2014.

Got it.

Great.

I also just wanted to clarify your JLG program.

Perhaps I missed this, but when is that going to be starting?

And is that on a new product or a product that already existed and you could just change the flyers?

This is a new product that was developed by our teams in conjunction with JLG.

I don't know, Michael, exactly when it is launching, but I think I understand it is launching in the not-too-distant future.

These products will be supplied to JLG, as well as certain other Tier 1 suppliers that are affiliated with JLG and build parts for them, so it was a good outcome for our Company.

Okay, and just two more here, if you will indulge me.

First, your efforts, Joseph, for construction and ag, I am not sure if I took this right.

Is your plan to undergo some kind of a broad restructuring program for that segment or you're just going to be heading around the world listening to your customers and your employees?

How is that -- I am not sure what the exact nature of your plan is.

Is it formal or informal?

Yes, I think it's too early to comment on that, but I can tell you we know how to design products.

We know how to build them.

We want to make sure we are designing low-cost products and build them where the cost is sustainable, so that we can sell them, strike them, and to make money doing that.

We have a very low market share in agriculture, as Rich mentioned, and there is tremendous opportunity to grow market share there doing that right.

Okay.

And then lastly here, your cash balance is the highest it has been in a couple of years.

Do you need all the cash?

Do you have any plans for it?

Is there M&A in the hopper here or something else we should be thinking about?

Is there cash foreign that needs to be brought back or can't be brought back?

Any color there, Tim, I would appreciate it.

Okay.

Well, addressing your question as location of the cash, this varies obviously a little bit from period to period, but as we sit here today, approximately $22 million of it is offshore.

We are happy at this point to leave it there.

It is in areas of the world in which we generally desire to make investments, so that's good.

We can bring it back.

There is a cost to doing so, and so since we, for the most part, intend to use it where it is sitting now, we don't intend to bring it back.

As regards the total overall cash balances, and I guess maybe our capital structure taken in conjunction with that, as I think you know we evaluated our capital structure, our liquidity, the bonds, the ABL to make sure that it was appropriate for our strategic plan.

And we have concluded that, by and large, it is.

It provides us with ample liquidity and the terms of the indenture are very flexible covenants.

So, we are fine with the capital structure and the liquidity as of since right now.

Having said that, as you can appreciate, we in the ordinary course evaluate any opportunities to enter the capital markets to perhaps to refinance, redeem these senior secured notes.

As you can appreciate, there is today reasonably large costs associated with doing so.

The optional redemption premium is about 400 basis points, or $10 million, and, of course, there is other costs associated with any redemption of the notes.

So the trick here is to evaluate that cost in light of the future capital markets and the access that we would have to them and also the interest-rate environment.

So that's what we do in the ordinary course.

We stay very, very close to that evaluation so that we can pivot at any point in time reasonably quickly if we think it is prudent to do so.

Just in an absolute sense as regards the cash balances, there is an opportunity always to bring in some of the bonds to delever the Company a little bit if we decide that we want to do that, and notwithstanding the fact that our strategy is an organic growth strategy, we stay close to opportunities in the marketplace.

We're in the deal flow.

We know what's available, and if an opportunity to deploy that cash in a value-accretive way comes to us through some sort of an M&A activity, we certainly would give very serious consideration to doing so.

Great.

That's well said.

I should give others a chance, yes.

I will hop back in queue.

Thank you so much, guys.

(Operator Instructions).

Mike Shlisky, Global Hunter.

Me again.

Well, I guess I have another chance to ask one more question.

I just figured I'd give someone else a shot.

But while I still have you on the phone here, I was curious about how things are going thus far on CVG 2020.

You have gotten reasonably good EBITDA growth the last couple of quarters here, but doesn't it get harder at this point out?

At this point, it is still a fairly rough ag market.

Construction market seems to be at least deteriorating on the equipment side.

Can you give me a sense as to what your next bites are to get this plan going, maybe over the next six to 12 months here?

Yes, Michael, it's Rich.

I will take that.

I think that as we reviewed with the analysts about a year ago, we have got some pretty specific plans across the organization to drive the revenue and profit growth that we have committed to as a part of CVG 2020.

A large part of that growth, a large part of that process improvement comes in the area of product design, product development, product introduction, and also development of sales and marketing capabilities.

As we pro forma'd out what our performance would be over the next five to six years, we built in some assumptions in terms of industry growth or industry contraction.

So, we are confident that with the product and the marketing plans we have in place, we're going to be in a position to drive the topline, and with the margin management execution that we have in place, we are confident we are going to be able to improve the bottom line in line with our topline growth.

So, yes, I think that in the next six, 12, 18 months, the growth -- the margin improvement will come in those plans, those initiatives that we established at the outset of CVG 2020, and we're staying really sharply focused on execution and driving those plans that will make the difference in the numbers.

Okay, fair enough.

But is there anything we should look for first?

Would you say you have got some ag wins in the hopper?

I see you just won JLG here.

Do you think you will see more on the construction side?

Any kind of thoughts as to where we should be thinking you're going to go next, at least in the very (multiple speakers)

Look, I think you should expect to see, and this is really a part of our plan, you should expect to see that we're going to improve our performance across industries and across regions and across product groups.

So I can't call out one specific area that is going to be the largest contributor.

I would only say that you should expect to see improvement with programs that we are going to introduce across the board.

All right, great.

Well, thanks for the answers.

I really appreciate it, guys.

Thank you.

I am showing no further questions.

I would like to turn the call back to Richard Lavin, CEO, for closing remarks.

I just want to thank everybody for calling in.

We're happy to share our story for the second quarter and we look forward to getting back together with you at the end of the third quarter.

Thanks, everybody.

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

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.