Commercial Vehicle Group Inc (CVGI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Commercial Vehicle Group Inc. Q3 2015 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Terry Hammett, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Christie, and welcome, everyone, to our conference call. I would like to remind you that this conference call is being webcast. It may also contain forward-looking statements, including but not limited to, expectations for future periods regarding market trends, cost-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, 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 will now turn the call over to Rich Lavin, Chief Executive Officer of Commercial Vehicle Group. Following Rich, Pat Miller, President of Global Truck and Bus, will provide an update on our global truck and bus segment. Then, Tim Trenary, our Chief Financial Officer, will cover the quarter's financial results. I will now turn the call over to Rich.

Thanks, Terry. Good morning and welcome to our call. As regards our results, our consolidated revenues were down in the third quarter 2015 as compared to the third quarter of 2014 by about 5%. More than all of this decline in sales is attributable to the macroeconomic headwinds that continued to adversely affect the market place for our construction and agricultural products. On the other hand, North American medium- and heavy-duty truck production continued apace in the third quarter.

Notwithstanding the consolidated decline in sales, net income this quarter was up compared to the year-ago period, as was earnings per share. Net income was $2.6 million compared to $1.2 million, and earnings per share was $0.09 in the third quarter as compared to $0.04 in the third quarter of last year. We were pleased with our overall cost discipline and therefore operating income pull-through on the lower sales for the quarter. This is especially true of our construction and agricultural segment. This segment's sales were down about $15 million in the quarter compared to the third quarter of last year.

As disappointing as this quarter-over-quarter top-line performance was, operating income was relatively unchanged. This is a rather remarkable achievement, flat operating income on a 15% reduction in sales, and reflects considerable cost discipline on the part of our business associates in ConAg. And this illustrates our ability to protect margins on lower sales. There has been a fair amount of news of late regarding the continuing global contraction in construction and ag equipment sales. And I've already mentioned, this is reflected in our sales performance. But we firmly believe that construction and ag products are core businesses for us over the long-term, representing a very attractive growth opportunity.

As part of CVG 2020, our long-term strategy, we identified the initiatives in this segment we would invest in to position us to grow. In large part we are focused on updating and diversifying our product lines to enable us to participate in a larger share of these industries. These product design programs are well underway and will begin to be introduced in 2016. Notwithstanding the contraction in construction and ag, we remain confident in the long-term attractiveness of these industries and we intend to continue to dedicate resources to this business segment, consistent with our long-term strategy.

As regards global truck and bus businesses, these businesses continue to benefit from comparatively high production levels in North America, especially with respect to heavy-duty trucks. Notwithstanding some softness in orders of late and elevated inventory levels, it looks like Class 8 truck production in North America could be in the range of 320,000 to 330,000 units this year. It is likely that there will be some moderation in Class 8 build in North America in 2016, but most forecasts are for 2016 heavy-duty truck production to remain above the generally accepted annual replacement level.

As regards the economy, the global economy we think is forecast to grow in 2016 by about 2%. But that growth may be uneven again in 2016. We expect that North America may grow at about the global average, 2%; that Europe may be flat to modestly up; that China, in line with their most recent pronouncement on economic growth, may grow above 6.5%; and the rest of Asia-Pacific at about 3%. The global growth picture is overall positive and supports our plan to continue to invest in growth initiatives in each of the [trispheres].

We are, of course, attuned to the significant reductions in construction and ag OEM's build schedules. In some cases we've seen top-line contractions of 20% from peak levels. And as I've mentioned, it looks like 2015 will be the peak for heavy-duty truck production in North America. Accordingly, we are in the process of revising and refining our thinking regarding manufacturing capacity utilization and manufacturing footprint for both of our segments, and considering other changes to our overall cost structure.

As this reevaluation process is ongoing, we're not prepared at this moment to announce any actions, but we expect to be in a position to finalize a plan to address these developments soon, perhaps as early as before the end of the year. Pat Miller, as Terry mentioned, the President of Global Truck and Bus, is with us today. And I will now turn the discussion over to Pat for more color on this part of our business and to describe some of the progress we are making in our global truck and bus segment. Pat?

Thanks, Rich. As Rich mentioned, I manage the global truck and bus division for CVG. Our sales for North America remained on a strong pace in the third quarter. The total year is still shaping up to be a very good one historically for truck and bus. There were some normal customer shutdowns during the summer and there were also some unplanned down days taken by a few of the OEMs.

We've seen tempering of build rates with a few OEMs as they work to balance inventory levels, the backlog, and their production flow. Most of the market indicators, like freight tonnage and truck retail sales, are still positive year-over-year. The market experienced net truck order reductions during the summer months and consequently a reduction in the backlog. The backlog is still in a healthy range.

The order cancellation experienced in August and September has led to near-term empty slots. October North American Class 8 orders were about 25,000 units, which is more in line with ongoing replacement rates. We are maintaining our projection that the Class 8 North American truck production for 2015 will be in the range of 320,000 to 330,000 units. As for 2016, we believe production levels will decline from 2015 but will likely remain above replacement levels.

North American medium-duty Class 5 through 7 production levels have been consistent in 2015. October's strong order rate suggests that that consistency will continue in 2016. The medium-duty backlog and sales are in balance and both our healthy. We have been very active around the globe, and in particular North America, as many of the OEMs are currently refreshing platforms targeted for 2017 and 2018 time frame.

As we have discussed before, CVG is fully engaged in quoting, developing and launching a pipeline of next gen replacement and also new incremental business. Frequently we are not at liberty to disclose details of future wins until the OEM has announced or launched the program. I do have some news that I am able to share. As of July this year, CVG launched and is applying the seating products for the new Ford medium-duty F-650, F-750 vehicles being produced in Avon Lake, Ohio. This program is in production and ramping up volumes.

Secondly, I would like to share that CVG has successfully extended agreements on next-generation products with a global OEM truck maker in North America that includes truck seating, cab bodies and interior trim components through the year 2020. These agreements exemplify our ability to compete for next-gen products through innovation and development capabilities. The extensions represent approximately $37 million to $42 million in annual revenues, as well as increased content per vehicle.

Lastly, I want to mention our momentum in India is increasing as we are seeing progress partially as a result of our locally designed and sourced modular seat line. We have added new customer seat programs in India with Komatsu, Eicher and JCB. Additionally, we have launched and are ramping up the Tata Xenon light commercial vehicle program.

During the first quarter, I mentioned a few new aftermarket products, namely the waste refuse seat and the LTSS, or light truck suspension seat, targeted at Class 3 through 5 trucks. We are in production today and shipping both of these products to aftermarket customers. Some of the top fleets in these segments have our seat undergoing field trials. We will continue to develop and expand our product portfolio in this channel.

As part of our efforts to maintain a connection to the driver community, we have gone live with two new branded websites, NationalSeating.com and BostromSeating.com. Both sites cater to all of the users of our products to provide detailed information and application-specific support. Our sites allow users to search by their vehicle type, configure seat options live, and locate the closest dealer. These features generally are not offered by others in our segment, so we are excited about the next step in our ability to provide our customers easier access to the data they are seeking.

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

Thank you, Pat. Consolidated third-quarter 2015 revenues were $202.7 million compared to $213.8 million in the prior-year period, a decrease of 5%. Our financial results, and more specifically our revenues, continue to be adversely impacted by foreign currency exchange rate, or FX, headwinds. Our top line was adversely impacted by FX translation in the third quarter by $4.5 million. As adjusted for foreign currency exchange translation, third-quarter 2015 revenues decreased by 3%.

Our consolidated sales also continue to be adversely impacted by the soft global construction and agricultural equipment markets. On the other hand, our global truck and bus businesses continue to benefit from high levels of truck production in North America. Global truck and bus revenues increased 3% over the third quarter of 2014.

Operating income in the third quarter was $9.9 million compared to operating income of $9.7 million in the prior-year period. This 2% improvement in operating income was achieved notwithstanding the lower revenues in the current quarter. Accordingly, the Company's operating income margin in the third quarter improved to 4.9% from 4.5% last year. Our operating income margin is benefiting from an improved gross profit margin and lower selling, general and administrative expenses. Year-over-year for the quarter and for the nine months ended September 30, 2015, the Company's gross profit margin is up 50 basis points and 60 basis points, respectively. Meanwhile, SG&A was down almost $1 million quarter over quarter and was down almost $3 million for the nine months ended September 30, 2015. FX translation is helping us a bit here but most of the decline in SG&A is cost management.

Net income was $2.6 million in the third quarter or $0.09 per diluted share compared to net income of $1.2 million or $0.04 per diluted share in the prior-year period. Some of this improvement in earnings is attributable to a lower effective tax rate in the current quarter compared to the prior year: 46% this quarter versus 74% in the [earlier] period. For the nine months ended September 30, 2015, the Company's effective tax rate was 47%. We are increasing our projection for the full-year effective tax rate to about 50%, up from 45%.

Depreciation for the third quarter of 2015 was $4.1 million; amortization, $0.3 million; and capital expenditures were $3.4 million. We will make fewer capital expenditures in 2015 than we had originally planned. We now project capital spending on the order of $16 million to $20 million for the year. Some of this reduction in spend reflects more efficient acquisition of capital goods and the favorable impact of foreign currency translation, but some of the reduction reflects an expected carryover of spend into next year, 2016. We don't expect the lower capital spending than planned in 2015 to have a material effect on our realization of our long-term strategy.

We announced a couple of weeks ago the redemption of $15 million of our $250 million outstanding senior secured notes. We expect this redemption to occur on or about November 15. Redemption will reduce annual interest expense by $1.2 million and is consistent with our capital allocation strategy. More specifically, to provide first for adequate liquidity and capital for growth, and then to deleverage the balance sheet. After giving effective redemption, our gross leverage, expressed as a multiple of trailing EBITDA, will come in just under 4 times EBITDA, and therefore just inside the 2 to 4 times trailing EBITDA range we had targeted.

Two years ago, CVG's gross leverage was considerably higher. We are pleased with our progress to date in delevering our Company. The reduction premium will cost about $600,000 or $300,000 more than had we waited until the middle of next April to trigger this event, when the redemption premium steps down by 200 basis points. But the monthly interest savings is almost $100,000, so this will be a cash-accretive event as compared to triggering the redemption next April.

The redemption was in part made possible as a consequence of $52 million of net cash provided by operating activities for the nine months ended September 30, 2015. Adjusted for the $15 million anticipated redemption and the semiannual $10 million interest payment we made last month, at September 30, 2015 the Company had liquidity of $122 million. That's $85 million of cash and $37 million of availability from the asset-based revolving credit facility.

Turning now to our segment financial results and first to our global truck and bus segment. Revenues in the third quarter of 2015 were $142.9 million compared to $139 million for the prior-year period. That's an increase of almost 3%, 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 $0.6 million.

GTB operating income in the third quarter was $16.4 million and the margin was 11.5%. This compares favorably to the prior-year period's operating income and associated margin of $15.1 million and 10.9%, respectively. Third-quarter 2015 and 2014 results include facility closure charges of $0.3 million and $0.1 million, respectively. Operating income pull through in the third quarter of 2015 on the incremental sales exceeded our expectation for the global truck and bus segment.

As regards our global construction and agriculture segment, revenues in the third quarter 2015 were $62.5 million compared to $78 million in the prior year. That's a decrease of 20%. FX translation negatively impacted GCA sales by $3.9 million in the third quarter. Accordingly, as adjusted for FX translation, quarter-over-quarter sales decreased $8.2 million, or by 12%, reflecting the softness in our construction and agriculture end markets, generally globally. Operating income was $0.8 million for the third quarter of 2015 as compared to $0.9 million for the prior-year period and the associated sales reduction for the quarter. While the lower year-over-year sales in GCA are disappointing, it is notable that are GCA associates were able to hold operating income flat on the lower sales.

That concludes my comments today regarding our third-quarter financial results. And we will now open the call for questions.

(Operator Instructions) Mike Shlisky, Seaport Global Securities.

Got a couple questions here. I know you guys don't usually give full guidance here, but we are already in November. You've already probably got a good portion of at least the truck OEM builds; I would actually probably imagine some of the construction and ag guys, too. Could you give us any kind of sense whether you expect to see either sequential improvement in your revenues or perhaps year-over-year improvement in the fourth quarter, at the very least?

Industry for global truck and bus? Sure. Fourth-quarter for us in truck and bus in 2015 -- first, there's less actual build days in the fourth quarter, just by the nature of the calendar and the holidays. That tends to impact our revenues every year, historically. Additionally, this year there are, as I mentioned, there has been some planned shutdown days at our customers due to some inventory buildups and also they are cleaning up some of the production flow and overflow that they've been experiencing at the high build rates. And so when we look at that quarter over quarter, we think that will impact us negatively compared to the third quarter.

Mike, on construction and ag I think everybody is aware of the I think some of the dynamics in those industries and everybody is aware of the results announcements from some of the large OEMs. I think the expectation is that we have either touched bottom or have nearly touched bottom in construction and ag, in the third and fourth quarter this year. So, our expectation is that what we are seeing in the fourth quarter may be the worst that we will see out of construction and ag, and that's our mindset heading into 2016.

Okay. That's great color. Thanks, guys. Can we also just touch on the balance sheet as well? Trying to map this out here, even if you include the debt repayment, at $85 million of cash, you still got more than you had a year ago. And looking at where the outlook is for the truck markets in 2016 as well as, quite frankly, some of the construction and ag markets, is there a way or a chance you can liquidate some of your working capital in 2016? Generate some more cash, obviously hopefully have good margins as well, and potentially pay down some additional debt at some point late next year?

Let me first of all provide you with what I'll characterize as a short answer to your question and then provide a little color as to why I come to that conclusion. The shorter answer is yes, that's what we believe, yes to your question. Let me give you some color. As regards the operating working capital, if you've had a chance to look at the cash flow statement, we've done a nice job of managing that for the first nine months of this year. Perhaps a more meaningful comp would be to look back to September of last year because it takes out the vagaries of the various cycles, quarterly cycles.

If you were to do that, what you would learn is that for the last 12 months we've managed down the Company's operating working capital, receivables, inventory and payables collectively by $12 million. Okay? So over the last 12 months that's $12 million of cash build. Going into next year, to your point about being able to continue to manage that, it has our attention and we believe that through continued management of that piece of the balance sheet that there's perhaps some additional opportunity there. We think we've harvested the lion's share of it. But I think there still is perhaps some opportunity.

Now, those comments, taken together with the cash at September 30 pro forma for the interest payment and the redemption -- more specifically the $85 million that you mentioned -- that is, especially taken together with the AVL, adequate liquidity to manage our business. And as we move through next year and the health of our markets -- ConAg, Pat's business in truck and bus, the management of our balance sheet, and other sort of considerations, we will in the normal course continue to consider the deleveraging of the balance sheet. So, more to come on that.

Okay, okay. Exploring some more here, if you guys don't mind, could you give me some kind of visibility that you've been hearing from some of the OEMs, especially in truck and bus, on their production schedules going into 2016? What I'm getting at, you've got pretty high industry backlog, so everyone knows what's coming on their production schedules. Have they given you plenty of notice here on when to ship what? And do you feel pretty confident that keeping your operating income pull through at a relatively high level in 2016?

So this was specifically for truck and bus?

Well, sure. Of course, I would ask a similar question, I would say, for construction and ag, too. But yes, I was talking more about truck and bus.

So the way I would answer that is yes, the visibility varies depending on what kind of orders they've got in their backlog. We don't always have complete visibility to what exactly is in the backlog. I believe we've demonstrated clearly over the past two years in our group that we are able to flex up and down as those orders fluctuate and deliver the pull through that we've been achieving. And I think we have a pretty good track record of that. I think, as far as -- a little bit more color. If you are asking where they are seeing it, I believe the customers have come out here recently -- at least a couple of them, larger OEMs have come out and given some guidance on what they believe 2016 looks like in total.

Well, I guess what I'm saying is -- and I know, Rich, I don't think you were here last time we had a pretty big decline in the market, if I recall correctly. But there were some issues with CVGI trying to keep up with the declines and inventories that may have been too high. And it also had some issues on the upside, too. When things got better, there were some issues with getting things shipped quickly and so forth. There wasn't a lot of lead time. My question here is, do you feel better about where you're -- about the OEM communication now than what we saw a couple of years back, to manage your people and your production?

So that's a good question. I'm sorry; I didn't completely understand that was your direction there. So, I think if you go back historically through some of the previous downturns, a lot of times, as some of the orders moderated, the production levels would continue to stay at the high levels they were at too long. And consequently you get an overbuild and then you would have to have a correction.

And it's interesting; as you are tracking today where things are, it seems to be much more aligned. As some of the orders have moderated, we have seen adjustments already being made ahead of time by our customers and, consequently, by us. We are paying very close attention to that issue. As you can imagine, many of us who went through the last one understand the ramifications of that. So it's a good question. It's something that's on our minds as we manage through the changes in the cycles here.

The only thing I would add is that on the construction/ag side of the business we are getting, I think, good information from the OEMs regarding their inventory situations. But also their build schedules going through the first and into the second quarter of 2016. But I think it's important to note that, as part of our business planning process this year, we are going through a very rigorous exercise to ensure that we are positioned to respond quickly in the event that we see changes in industry, changes in order levels that go beyond what we are anticipating as a part of our base business plan.

So we are getting good information. We think we've got a good sense as to where the OEMs are at, where they will be in the first quarter/first half of 2016. We are also putting very explicit, well-thought-through, complete plans in place to respond in the event we see something more negative than we are currently projecting.

Okay. And if I could just throw in one more follow-up here on what you said earlier, and maybe that's follow to what you just said, Rich. I know you didn't want to put any details out. Perhaps we'll get something in the next month or two here, but on the changes you might be making to your footprint or your capacity and so forth, are you guys looking at a formalized restructuring plan? And Tim, could there be a cash impact there as well? Can you give me a sense as to what might happen or is this going to be simply scaling your labor? Just kind of talk about how [multiple speakers] be?

Obviously, we can't speak to any details in the plan right now, but I can say that it goes beyond simply managing headcount to respond to fluctuations in demand levels from our OEMs. It really is an across-the-board, deep look at our manufacturing footprint, the customers we are now serving out of different locations, the capacity we are going to require in order to serve markets and serve key OEMs going forward. It will be on that basis that we come up with a plan for restructuring, changing our footprint going forward. Does that help?

Obviously, we have to wait for the details. Obviously, I think the devil is in the details. I guess I would just ask, is there a potential for a pretty big cash outlay here? Or is it simply more non-cash in nature or possibly the sale of something which would generate cash? That's my main question. The balance sheet impact here, mainly.

It will have a cash -- this restructuring program that Rich just described will have both cash and non-cash impacts, Mike.

Okay. All right, guys. I've grilled you enough. I'll hop back in queue. Thanks very much.

(Operator Instructions). I'm not showing any further questions on the phone lines at this time. I would like to turn the call back over to Mr. Rich Lavin for any closing remarks.

I think I would just close by thanking everybody for calling in. The third quarter was a good quarter in many respects. And I think we really made the investments, we put the plans in place to continue to grow our business going forward. And so, we look forward to sharing those plans and the results of those plans with you in the future. Thanks again for calling in.

ladies and gentlemen, thank you for your participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.